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4 GARP Stocks to Boost Your Portfolio Returns

If you’re looking for a profitable portfolio of stocks that will offer the best of value and growth investing, try out the GARP strategy which targets growth at a reasonable price. Rather than investing in both value and growth stocks like blend investors do, investors following GARP would love to invest in undervalued stocks that offer solid growth prospects too.

This strategy is best suited for an environment where major benchmarks are witnessing a strong rebound in the latter half of a particular time frame after plunging in the first half.

GARP: Best of Value & Growth Investing 

Though investors following GARP consider popular metrics of both value and growth investing, the ideal range of these metrics are different from what value and growth investing consider. GARP investing employs popular value metrics – price-to-earnings (P/E) and price-to-book value (P/B) ratio – to evaluate whether a stock is undervalued or not.

In case of P/E ratio, investors following the GARP strategy look for a higher value of the ratio compared to value investors. However, they avoid picking companies with extremely high price-to-earnings ratios. On the other hand, like value investors, GARP investors give precedence to low P/B ratios. A ratio less than the industry average is preferred by GARP investors for choosing undervalued stocks.

The other metrics that are borrowed by GARP investors from the growth investing strategy are strong earnings growth history and impressive earnings growth prospects in the coming years. Unlike growth investors, GARP investors look for 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.

Return on equity (ROE) is another growth metric used in GARP strategy. This strategy considers those stocks that have higher ROE compared to the industry average as strong ROE is an indicator of superior stocks.  

In order to make GARP strategy more profitable, we have only considered those with a favorable Zacks Rank as well as good value and growth scores. 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.

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 and P/B ratios less than X-industry average
(P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)

Value and growth scores less than or equal to B
(Value as well as growth scores of either ‘A’ or ‘B’ indicate that the stock is poised to offer the best of both worlds.)

Here are 4 stocks that made it through the screen:

Casey's General Stores, Inc. (CASY)

Signet Jewelers Limited (SIG)

The TJX Companies, Inc. (TJX)

HEALTHSOUTH Corp. (HLS)

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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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HEALTHSOUTH CP (HLS): Free Stock Analysis Report
 
CASEYS GEN STRS (CASY): Free Stock Analysis Report
 
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SIGNET JEWELERS (SIG): Free Stock Analysis Report
 
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