Every investor will love to acquire fast growth stocks at a cheap price. GARP investing is a combo investing strategy. It combines both value and growth investing strategy.
When a stock is analyzed properly you can see your investment grow fast making new highs.
Value investors are interested in undervalued stocks with expectation that price will rise over time. That is, resulting to the true value of the stock.
Growth investors are interested in stocks with higher earnings with expectation that its capital gain will beat its average value within a few years.
GARP investing does not mean holding equal amount of growth and value stocks in your portfolio.
GARP means Growth At a Reasonable Price.
A growth that is not slow but a conservative growth. An extreme growth will only make stock overpriced.
It is a stock picking approach that avoids the extremes of both value or growth investing. It is an investing strategy in-between either value and growth investing.
Why do GARP investors combine both strategies? They are looking for cheap undervalued stocks with higher earnings potential.
What are some metrics GARP investors pay attention to?
⦁ Price to Earnings ratio: P/E ratio, tells how cheap or undervalued a stock is. A lower P/E means undervalued stock. A higher P/E means an overvalued stock.
⦁ PEG ratio: A PEG ratio will give a clearer picture on how cheap a stock is. A good rule of thumb is a PEG ratio less than 1 signifies an undervalued stock.
⦁ Earnings growth: A GARP stock usually have an annual earnings growth between 10% – 20% which is a conservative growth. For a growth stock(above 25%) and earnings growth of a value stock(5% – 12%).
⦁ Unique product/service: For a company to obtain a substantial growth. They should offer unique products or services. Products/services they don’t need to change often to stay competitive.
Examples of companies with a unique product and service are Coca-Cola and Moody’s Corp..
⦁ Debt to Equity ratio: A stock might have a good growth potential but be always cautious if they are able to meet their debt obligations. If they cannot, they might be forced to file for bankruptcy. The lower the ratio the safer your investment.