If you are looking for a profitable portfolio of stocks offering the best of value and growth investing, try the growth at a reasonable price or GARP strategy.
The strategy helps investors gain exposure to undervalued stocks with impressive prospects. Unlike a blend strategy, a portfolio that uses GARP investing is expected to include stocks that offer the best of both value and growth investing. Bloomin’ Brands BLMN, Adobe ADBE, W.W. Grainger GWW and Cintas CTAS are some GARP stocks that hold promise.
GARP Metrics — Mix of Growth & Value Metrics
The GARP strategy seeks to offer an ideal investment by utilizing the best features of both value and growth investing. Investors adopting the GARP approach prefer buying stocks priced below the market or any reasonable target determined by fundamental analysis. These stocks also have solid prospects in terms of cash flow, revenues, earnings per share (EPS) and so on.
A strong earnings growth history and impressive earnings prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal growth rates, pursuing stocks with a more stable and reasonable growth rate is a tactic of GARP investors. Hence, growth rates between 10% and 30% are considered ideal under the GARP strategy.
Another growth metric that both growth and GARP investors consider is the return on equity (ROE). GARP investors look for a strong and higher ROE than the industry average to identify superior stocks. Moreover, stocks with positive cash flows find precedence under the GARP plan.
GARP investing prioritizes the popular value metrics — the price-to-earnings (P/E) and price-to-book (P/B) ratios. Though this investing style picks stocks with higher P/E ratios than value investors, it avoids companies with extremely high P/E ratios.
Using the GARP principle, we ran a screen to identify stocks that should offer solid returns in the near term.
Along with the criteria discussed in the above section, we have considered a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Last 5-year EPS & projected 3-5-year EPS growth rates between 10% and 30% (Strong EPS growth history and prospects ensure improving business.)
ROE (over the past 12 months) greater than the industry average (Higher ROE than the industry average indicates superior stocks.)
P/E and P/B ratios less than the M-industry average (P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
Here are four of the five stocks that made it through the screening process:
Bloomin’ Brands is a casual dining restaurant company with a portfolio of differentiated restaurant concepts such as Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse, and Wine Bar and Roy's. The company currently sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.
Bloomin’ Brands has a trailing four-quarter earnings surprise of 7.51%, on average. The Zacks Consensus Estimate for BLMN’s 2023 earnings has moved 9.7% north to $2.93 per share over the past 60 days.
Adobe is a diversified software company that offers a wide range of products and services through the Software-as-a-Service (SaaS) model, managed services model, and term subscription and pay-per-use models. ADBE currently carries a Zacks Rank #2.
Adobe has a trailing four-quarter earnings surprise of 2.58% on average. The Zacks Consensus Estimate for ADBE’s fiscal 2023 earnings has moved 1.2% north to $15.41 per share over the past 60 days.
W.W. Grainger is a broad-line, business-to-business distributor of maintenance, repair and operating products and services primarily in North America, Japan and the U.K. The company currently sports a Zacks Rank #1.
W.W. Grainger has a trailing four-quarter earnings surprise of 9.81%, on average. The Zacks Consensus Estimate for W.W. Grainger’s 2023 earnings has moved 1.9% north to $33.29 per share over the past 60 days.
Cintas designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, plus first-aid and safety products for diversified businesses. The company currently carries a Zacks Rank #2.
Cintas has a trailing four-quarter earnings surprise of 4.94% on average. The Zacks Consensus Estimate for CTAS’ fiscal 2023 earnings has moved 1.2% north to $12.83 per share over the past 60 days.
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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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