Growth at a Reasonable Price (GARP)
Candlefocus EditorGenerally, companies with P/E multiples above the market average are labelled expensive, while companies with P/E multiples below the average are considered cheap. However, GARP investors look for companies whose P/E multiples are near the market average, as this provides a balance between growth and value investments. Additionally, GARP investors generally look at the price/earnings growth (PEG) ratio to assess how much a company’s stock price is reflecting the company’s actual growth. A PEG of 1 or less is typically sought to ensure the stock is not overvalued. If the PEG is greater than 1, it suggests the company is overvalued relative to its long-term earnings growth potential.
The GARP strategy is most often implemented through an index fund that follows the S&P 500 GARP Index or other indices that track stocks of GARP-style companies. These funds provide diversified exposure to the style, which smooths out the individual stock-specific risk and lowers the chances of massive losses. By investing in a GARP fund, investors can benefit from the growth prospects of the companies within the fund, as well as their low valuations.
Overall, the GARP strategy is an excellent way to achieve growth while maintaining an acceptable degree of risk. The strategy blends the best of both growth and value investing, enabling investors to select stocks that have strong prospects, but are not overpriced. GARP funds provide a unique way to access the GARP strategy, allowing investors to benefit from the growth potential of the underlying companies, as well as their low valuations.