Growth at a reasonable price (GARP) is an equity investment strategy that combines growth and value investing attributes.
It is a fundamental driven investment strategy that balances pure growth and pure valuation, as the former tends to invest in high-growth, yet expensive stocks, while the latter may take a long-term investment to pay off.
GARP investors are looking for a stock that is trading for slightly less than its estimated value that also has earnings growth potential.
GARP investors do not necessarily stick to specific ratios or valuation metrics to help them select stocks. GARP investors usually do follow price/earnings (P/E = current share price/earnings per share) valuations in order to find investments that have been slightly discounted by the market.
For instance, if XYZ Co., is currently trading at Rs.200 and its forecast earnings per share is Rs.12.5, the stock is trading at 16x its earnings. Depending on the industry, this P/E ratio could be high or low. A GARP investor would compare XYZ’s multiple to the multiples of other companies operating in the same industry. Typically, a P/E ratio in the 10x-20x range is reasonable for a GARP investor. Higher P/E multiples tend to indicate that the business is overvalued.
GARP investors also look for low price/book ratios (P/B = current share price/book value per share) and a PEG ratio of less than 1 (PEG = P/E ratio/projected growth in earnings).
While the criteria used to identify a quality company can differ, some shared attributes typically include
- Sustainable business model
Sustainable business model and a strong competitive advantage are better positioned to maintain their market position and generate consistent profits over time.
- Consistent earnings growth
Investors are typically more attracted to companies that have a track record of consistent earnings growth, as this is indicative of the company’s ability to sustain its growth in the future.
- Strong financials
Companies that possess a robust financial position, characterised by a low level of debt, a healthy balance sheet, and strong cash flow, are typically regarded as being of higher quality when compared to those with weak financials.
- Management quality
Companies with competent management team that have a proven track record of making sound business decisions are generally considered to be of higher quality.
Since, GARP strategy is a hybrid solution for growth and value stock-picking, a GARP investor will experience a combination of returns. For instance, a value investor will do better when markets are falling, while a growth investor will do best as markets rise. A GARP investor will be somewhere in the middle.
