{"id":15081,"date":"2021-03-17T08:30:00","date_gmt":"2021-03-17T12:30:00","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=15081"},"modified":"2022-06-01T15:35:56","modified_gmt":"2022-06-01T19:35:56","slug":"garp-investing-growth-at-a-reasonable-price-csmit","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/garp-investing-growth-at-a-reasonable-price-csmit\/","title":{"rendered":"GARP Investing – Growth at a Reasonable Price"},"content":{"rendered":"\n

Growth at a Reasonable Price (GARP) investing is a hybrid style of investing which combines both growth investing and value investing attributes. Investors following a GARP strategy are looking to stay in the middle of the universe of investible companies by investing in stocks that have above-average growth rates but still trade at reasonable valuations that are neither too expensive, nor too cheap. GARP refers to a methodology for selecting single stock investments and should not be confused with a balanced portfolio of various value and growth stocks.<\/p>\n\n\n\n

GARP investing is often associated with legendary investor Peter Lynch, who achieved record averages of 29.2% annual returns while managing the Magellan Fund at Fidelity Investments, between 1977 and 1990. In his quest for finding both value and growth stocks, Peter Lynch popularized the price\/earnings to growth ratio (PEG ratio) which will be discussed in more detail later.<\/p>\n\n\n\n

When I think of GARP investing, I am also often reminded of one of my favorite quotes from Warren Buffett seen below. The investment style of Warren Buffett\u2019s later years can arguably be said to have tilted more towards investing for growth at a reasonable price.<\/p>\n\n\n\n

\u201cIt’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price\u201d<\/em><\/p>Warren Buffett<\/em><\/cite><\/blockquote>\n\n\n\n\n\n\n\n

Growth Attributes of GARP<\/strong><\/h2>\n\n\n\n

Compared to pure growth investors<\/a>, GARP investors are more cautious in the type and level of growth they are willing to invest in. GARP investors are looking for companies that are already profitable, unlike pure growth investors which often make more speculative investments in companies that have not yet reported any profits. As such, GARP investors are not only concerned with growth in revenue but are more heavily focused on growth in profits.<\/p>\n\n\n\n

GARP investors are realists and do not want to pay for growth which may not happen. To help achieve this goal, GARP investors look for companies that have been able to achieve good historic growth rates in prior years. These historic growth rates are a good indication that the forecasted future growth rates are indeed possible. The trend in growth seen over recent years is also important and positive momentum is nice to see (although not essential if the valuation does not reflect it).<\/p>\n\n\n\n

Pure growth investors are often willing to invest in companies with high forecasted growth rates of +25%, but GARP investors are more cautious and know that such lofty growth forecasts carry too much risk. GARP investors are looking for companies with above-average growth rates of 10 \u2013 20% which carry less execution risk on the part of company management being able to achieve that growth.<\/p>\n\n\n\n

Value Attributes of GARP Investing<\/strong><\/h2>\n\n\n\n

Compared to pure value investors<\/a>, GARP investors know that high-quality companies often command higher prices in the market. While pure value investors are often looking for the least expensive stocks in the investment universe, GARP investors are wary of such companies realizing that they trade so cheaply for a reason. As a general rule of thumb, GARP investors are looking for companies with a P\/E of 15 \u2013 25x depending on the growth rate.<\/p>\n\n\n\n

GARP investors know that growth is not free and are willing to pay up for it. A valuation tool often utilized by GARP investors is the price\/earnings to growth ratio (PEG ratio<\/a>) which divides a company\u2019s P\/E by its growth rate. For example, if a company has a 15x P\/E but also has a 15% growth rate, it would have a PEG ratio of 1.0x.<\/p>\n\n\n\n

As a rule of thumb, GARP investors are generally looking for companies with PEG ratios below 1x which signifies that the company\u2019s growth is not being fully reflected in its valuation. This old rule of thumb of 1x comes from Peter Lynch\u2019s days in the 1980\u2019s when interest rates were much higher. In today\u2019s low interest rate environment, GARP investors are willing to pay closer to 2x.<\/p>\n\n\n\n

In order to judge value, GARP investors often look for companies which are able to achieve return on invested capital (ROIC) and return on equity (ROE) that are above industry averages<\/a>. These all-important profitability metrics can be used to identify superior companies which deserve to trade at higher valuations. Additionally, high ROIC and ROE metrics indicate that the business is able to generate excess returns on capital that can be reinvested in the business to drive future growth as calculated from sustainable growth rates<\/a>.<\/p>\n\n\n\n

Summary of GARP Investing Attributes<\/strong><\/h2>\n\n\n\n