Prepare Your Portfolio for 2017 with These 5 GARP Stocks
Investors interested to build a portfolio of stocks that have strong value as well as growth features may follow the growth at a reasonable price or GARP strategy to fulfill the objective. Investors following this strategy pick undervalued stocks with strong earnings growth history and prospects. While this appears similar to the blend strategy, there is a thin line of difference. While the blend strategy chooses value and growth stocks, the GARP strategy seeks to identify stocks that provide the best of both value and growth investing.
GARP Metrics – Mix of Growth & Value Metrics
Growth Metrics
Strong earnings growth history and impressive earnings growth prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, they choose stocks with a more stable and reasonable growth rate instead of choosing those with extremely high growth rates. Growth rates between 10% and 20% are considered ideal in the GARP strategy.
Another growth metric that is considered by both growth and GARP investors is return on equity (ROE). GARP investors look for stronger and higher ROE compared with the industry average to identify superior stocks. Moreover, stocks with positive cash flows get precedence in GARP investing.
Value Metrics
GARP investing gives precedence to one of the popular value metrics – price-to-earnings (P/E) ratio. Though followers of this investing style choose stocks with higher P/E ratios compared to value investors, they avoid picking companies with extremely high P/E ratios.
Moreover, price-to-book value (P/B) ratio is another value metric that is considered in GARP investing.
Using GARP principles, we have run a screen to identify stocks that should offer good returns in the near term.
Screening Parameters
Along with the criteria discussed in the above section, we have also considered favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) – to make the strategy more profitable.
• Zacks Rank less than or equal to #2
(Only Strong Buy and Buy rated stocks can get through.)
• Last 5-year EPS & projected 3–5 year EPS growth rates between 10% and 20%
(Strong EPS growth history and prospects ensure improving business.)
• ROE (over the past 12 months) greater than the industry average
(Higher ROE compared to the industry average indicates superior stocks.)
• P/E and P/B ratios less than X-industry average
(P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only five.
Here are the five that made it through the screen:
NICE Ltd. NICE provides enterprise software solutions. It has an average four-quarter positive earnings surprise of 7.2% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Microsemi Corporation MSCC is a leading designer, manufacturer and marketer of analog, mixed-signal and discrete semiconductors. This Zacks Rank #2 (Buy) stock has an average four-quarter positive earnings surprise of 10.2%.
Arch Capital Group Ltd. ACGL is a diversified financial services holding company, with an emphasis on the insurance sector. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 9.3%.
F5 Networks, Inc. FFIV is a leading provider of integrated Internet traffic and content management solutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 3.4%.
New Oriental Education & Technology Group Inc. EDU is the largest provider of private educational services in China based on the number of program offerings, total student enrollments and geographic presence. This Zacks Rank #2 stock has an expected earnings growth rate of 23.3% for the current year compared with the industry average of 0.9%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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F5 NETWORKS INC (FFIV): Free Stock Analysis Report
NICE LTD (NICE): Free Stock Analysis Report
ARCH CAP GP LTD (ACGL): Free Stock Analysis Report
NEW ORIENTAL ED (EDU): Free Stock Analysis Report
MICROSEMI CORP (MSCC): Free Stock Analysis Report
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