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4 GARP Stocks to Add to Your Portfolio Right Now

Growth at a reasonable price, or GARP, investing is best suited for investors seeking to bet on stocks that offers the best of both value and growth. In other words, these stocks are believed to be undervalued and also have strong growth potential.

GARP investing is a profitable investing strategy in a scenario where markets have witnessed a huge slump in the earlier part of a defined time frame, say three months, but have rebounded strongly thereafter.

However, one should not confuse GARP investing with a blend strategy. While blend strategy seeks to invest in both value and growth stocks, GARP investing requires both the value and the growth features in a single stock.      

GARP – A Mix of Growth & Value Investing

Growth Metrics

Both strong earnings growth history and impressive earnings growth prospects in the coming years 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 GARP strategy.

Another growth metric that is considered by both growth and GARP investors is return on equity (ROE). GARP investors look for strong and higher ROE compared to the industry average to identify superior stocks. Moreover, stocks with positive cash flows also get precedence in GARP investing.

Value Metrics

GARP investing gives precedence to one of the popular value metrics – price-to-earnings ratio. Though this investing style chooses stocks with higher price-to-earnings ratios compared to value investors, they avoid picking companies with extremely high price-to-earnings ratios.

Moreover, the PEG ratio, which is defined as a ratio of price-to-earnings ratio and earnings growth rate, 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

• 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 ratio less than X-industry average, PEG ratio below 1
(P/E ratio less than that of the industry and low PEG ratio indicate that the stocks are undervalued.)

Value and growth scores less than or equal to B
(Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.)

Using these criteria we’ve narrowed down the universe of over 7,700 stocks to only four.

Here are 4 stocks that meet these criteria:

(WHR) Whirlpool Corp.

(LEA) Lear Corp.

(DLPH) Delphi Automotive PLC

(AMG) Affiliated Managers Group Inc.

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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: http://www.zacks.com/performance.

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WHIRLPOOL CORP (WHR): Free Stock Analysis Report
 
LEAR CORPORATN (LEA): Free Stock Analysis Report
 
AFFIL MANAGERS (AMG): Free Stock Analysis Report
 
DELPHI AUTO PLC (DLPH): Free Stock Analysis Report
 
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