Growth at a Reasonable Price (GARP)

What Is Growth at a Reasonable Price (GARP)?

Growth at a reasonable price (GARP) is an equity investment strategy that seeks to combine tenets of both growth investing and value investing to select individual stocks. GARP investors search for companies that are showing consistent earnings growth above broad market levels while excluding companies that have very high valuations. The overarching goal is to stay away from the extremes of either growth or value investing; this typically leads GARP investors to growth-oriented stocks with relatively low price/earnings (P/E) multiples in normal market conditions.

Understanding Growth at a Reasonable Price (GARP)

GARP investing was popularized by legendary Fidelity manager Peter Lynch. While the style might not have inflexible boundaries for including or excluding stocks, a fundamental metric that serves as a strong benchmark is the price/earnings growth (PEG) ratio.

The PEG shows the ratio between a company's P/E ratio (valuation) and its expected earnings growth rate over the next several years. A GARP investor would seek out stocks that have a PEG of 1 or less, which shows that P/E ratios are in line with expected earnings growth. This helps to uncover stocks that are trading at reasonable prices.

In a bear market or other downturn in stocks, one could expect the returns of GARP investors to be higher than those of pure growth investors yet subpar to severe value investors who generally purchase shares at P/Es under broad market multiples.

GARP Investors versus Value Investors

Value investors try to buy stocks that are on sale. Value investors search at stocks at bargain costs for a) a larger chance to earn a future profit and b) less risk of losing your money in the event that the stock doesn't perform well as you had anticipated. This fundamental principle is called the margin of safety.

Value investors likewise don't buy into the efficient-market hypothesis, which postulates that stock prices already take the full spread of company, industry, and market data into account. Value investors believe that it's possible to pick overvalued or undervalued stocks relative to their current market price. Value investors might perform a discounted cash flows analysis (DCF) to determine a stock's intrinsic value.

Renowned value investors include Warren Buffett, CEO, and chair of Berkshire Hathaway, which grew to become one of the largest publicly traded companies in the world.

GARP Strategy

One of the most direct ways of using the GARP strategy is by investing in a index fund that utilizes the strategy. This removes breaking down your own stocks and come up with investments that fit the criteria of a GARP investment.

Standard and Poor's has created the S&P 500 GARP Index, which is an index that tracks "companies with consistent fundamental growth, reasonable valuation, strong financial strength, and strong earning power."

One fund that tracks the S&P 500 GARP Index is the Invesco S&P 500 GARP ETF (SPGP). It is a exchange traded fund that plans to invest 90% of its assets into the securities that make up the S&P 500 GARP Index.

The fund's largest holdings are in healthcare (29.39%) followed by information technology stocks (21.40%). Financials is the next heavily invested sector at 17.28%. The smallest invested sector is consumer staples at 3.71%. Above that is communication services at 5.61%. Well-realized stocks include Meta (formerly Facebook), Adobe, and Cigna. The fund likewise comes with a low expense ratio of 0.36%, pursuing it an affordable investment decision.

Highlights

• GARP stocks are growth-orientated with relatively low price/earnings (P/E) multiples.
• Growth at a reasonable price (GARP) is an equity investment strategy that combines growth and value investing attributes.
• GARP investors center around companies with earnings growth above broad market levels yet without extremely high valuations.
• Instead of selecting individual securities, investors can apply the GARP strategy through index funds that track the S&P 500 GARP Index.
• GARP investors typically use the price/earnings growth (PEG) ratio to make investment choices, seeking companies with a PEG of 1 or less.