What is Growth at a Reasonable Price (GARP)?
Growth at a reasonable price (GARP) is an innovative equity investment strategy that merges growth investing with value investing principles to identify the most promising individual stocks. GARP investors specifically target companies displaying consistent earnings growth above broader market thresholds while intentionally avoiding stocks with exorbitant valuations. The primary objective is to dodge extreme growth or value scenarios by honing in on stocks that offer balanced returns. Typically, this approach focuses on growth-oriented stocks with reasonably low price/earnings (P/E) multiples under normal market conditions.
Key Takeaways
- GARP is an investment strategy that melds growth and value investing characteristics.
- Investors following the GARP approach seek companies with robust earnings growth without inflated valuations.
- Stocks aligning with the GARP methodology often have relatively low price/earnings (P/E) multiples.
- An essential tool for GARP investors is the price/earnings growth (PEG) ratio, focusing on companies whose PEG is 1 or less.
- GARP strategy can also be implemented via index funds that shadow the S&P 500 GARP Index.
Understanding Growth at a Reasonable Price (GARP)
The GARP investment methodology gained popularity from legendary investor Peter Lynch. While the strategy doesn’t adhere to rigid rules for accepting or rejecting stocks, the price/earnings growth (PEG) ratio is an invaluable benchmark. The PEG ratio provides a crucial metric of evaluation by comparing a company’s P/E ratio with its expected earnings growth over several years. GARP-minded investors look for stocks with a PEG of 1 or lower, indicating reasonable valuations aligned with expected earnings upsurge—thus spotlighting reasonably priced stocks on the market.
Historically, during bear markets or stock retrenchments, GARP investors tend to eclipse the returns of pure growth investors, although they may trail strict value investors who prefer shares with markedly lower P/E ratios than those of the broad market.
GARP Investors vs. Value Investors
Value investors focus on acquiring stocks at discounted prices due to predictably higher future profits and reduced risk of poor performance. This method follows the ‘margin of safety’ principle. Contrary to strictly value-focused investors, proponents of the GARP philosophy believe in scrutinizing overvalued or undervalued stocks relative to their present market price. Tools like discounted cash flow (DCF) analyses often assist value investors in identifying intrinsic value. Iconic value investors such as Warren Buffett endorse this methodology.
GARP Strategy
Implementing the GARP strategy can be seamless by opting for index funds aligning with GARP principles. This alternative mitigates the labor of scrutinizing and selecting individual stocks while adhering to GARP benchmarks. A noteworthy index is the S&P 500 GARP Index, reflecting firms with consistent growth, reasonable valuation, robust financial health, and strong earnings capabilities.
One prominent fund adhering to the S&P 500 GARP Index is the Invesco S&P 500 GARP ETF (SPGP). This ETF invests about 90% of its assets in securities linked with the GARP Index. It heavily skewed towards sectors such as healthcare (29.39%), information technology (21.40%), and financials (17.28%), making it an attractive and low-cost investment alternative with an expense ratio of 0.36%.
Constituent stocks include well-known firms like Meta (formerly Facebook), Adobe, and Cigna, highlighting its diversified yet focused investment approach.1
Related Terms: Growth Investing, Value Investing, Price to Earnings Ratio, PEG Ratio, Bear Market.
References
- CFA Institute. “GARP Investing: Golden or Garbage?”
- S&P Global. “S&P 500 GARP Index”.
- Invesco Distributors Inc. “Invesco S&P 500 GARP ETF”.
- Invesco Distributors Inc. “Invesco S&P 500 GARP ETF, Fund Holdings”.
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