If you're looking for a profitable portfolio of stocks that will offer the best value and growth investing, try the growth at a reasonable price or GARP strategy.
The strategy helps an investor gain exposure to stocks that are undervalued and have impressive growth 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. Ulta Beauty ULTA, Broadcom AVGO, Automatic Data Processing ADP and Dollar General DG 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 to buy stocks that are 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.
Both 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 25% are considered ideal under the GARP strategy.
Another growth metric considered by both growth and GARP investors is the return on equity (ROE). GARP investors look for 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 gives priority to one of the popular value metrics — the price-to-earnings (P/E) ratio. Though this investing style picks stocks with higher P/E ratios compared to value investors, it avoids companies with extremely high P/E ratios. Moreover, the price-to-book value (P/B) ratio is considered.
Using the GARP principle, we have run 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 25% (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 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 screen:
Ulta Beauty is a leading beauty retailer in the United States, which offers a wide range of products, including cosmetics, fragrance, skincare, hair care, bath and body products, and salon styling tools in stores. The company currently carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.
Ulta Beauty has a trailing four-quarter earnings surprise of 49.84%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings has been unchanged at $20.07 per share over the past 30 days.
Broadcom is a designer, developer and global supplier of a broad range of semiconductor devices focused on complex digital and mixed-signal complementary metal oxide semiconductor-based devices and analog III-V-based products. The company currently flaunts a Zacks Rank #1.
Broadcom has a trailing four-quarter earnings surprise of 2.19%, on average. The Zacks Consensus Estimate for its 2022 earnings has moved north by 0.3% to $37.06 per share over the past 30 days.
Automatic Data Processing is a provider of cloud-based Human Capital Management technology solutions, including payroll, talent management, human resources and benefits administration, and time and attendance management. The company currently carries a Zacks Rank #2.
Automatic Data Processing has a trailing four-quarter earnings surprise of 6.23%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings has moved north by 0.1% to $6.98 per share over the past 30 days.
Dollar General is one of the largest discount retailers in the United States, which offers a wider selection of merchandise, including consumable items, seasonal items, home products and apparel. The company carries a Zacks Rank #2 at present.
Dollar General has a trailing four-quarter earnings surprise of 2.78%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings has moved north by 0.2% to $11.49 per share over the past 30 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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Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report
Dollar General Corporation (DG) : Free Stock Analysis Report
Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report
Broadcom Inc. (AVGO) : Free Stock Analysis Report
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