5 GARP Stocks To Enhance Your Portfolio Returns

An investing strategy that helps investors to pick stocks at a discount and offers impressive growth prospects has always been popular. Growth at a reasonable price, or GARP investing is one such strategy that seeks to achieve this aim.

Investors following this strategy pick undervalued stocks with strong earnings growth history and prospects. While this appears similar to the blend strategy, there is a thin line of difference. While the blend strategy chooses value and growth stocks, GARP investing looks for stocks that provide the best of both value and growth investing.

Key Features of GARP

The GARP strategy seeks to offer an ideal investment by borrowing the best features of both value and growth investing. While investors following the GARP strategy give precedence to value ratios such as price-to-earnings (P/E) and price-to-book value (P/B) ratio, they also use earnings per share (EPS) growth rates and return on equity (ROE) like growth investors to identify potential stocks. However, the range of the values of metrics that are considered by GARP investing may differ from those that are considered by value or growth investors.

While value investors look for an extremely low P/E ratio to choose a company, the GARP strategy focuses on acquiring stocks that have relatively higher ratios but less than their respective industry average. Meanwhile, GARP investing chooses stocks with P/B ratios lower than their industries similar to value investors.

Separately, investors following the GARP strategy give priority to stocks with an impressive EPS growth track record over those with extremely high growth rates. Companies that qualify GARP investing are believed to have past as well as expected growth rates over the next few years between 10% and 20%.

Another metric, which is borrowed by GARP investors from growth investing, is return on equity (ROE). Like growth investors, the GARP strategy looks for stocks with higher ROE than their industry average.

Screening Parameters

Along with the criteria we discussed in the above section, we have also considered favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) – to make the strategy more profitable.

• 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.)

Just these few criteria have narrowed down the universe of over 7,700 stocks to only seven.

Here are five of the seven stocks that made it through the screen:

DST Systems Inc. (DST)

Heartland Financial USA, Inc. (HTLF)

Affiliated Managers Group Inc (NYSE:AMG). (AMG)

Whirlpool Corp (NYSE:WHR). (WHR)

Central Garden & Pet Company (CENT)

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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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