What Is GARP Investing (Growth at a Reasonable Price)? Does This Strategy Make Sense?

Daniel Penzing
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GARP Investing Basics

GARP? You may have heard of it but have no idea why it’s a must-have investment strategy.

Like any astute DIY investor, you may have been led to the usual suspects: a Dividend Aristocrat, maybe a Growth or Value stock index fund, or, if you like individual stocks, the full list of Dow 30 stocks.

Now you may have a core portfolio, but you’re wondering what to do with that other chunk of the portfolio, the money that you know you’ll need to come back to you.

GARP Investing Basics & Legacy

Do you want growth? How much growth? Will it be reliant on earnings or price? What kind of P/E ratio do you envision? When? How fast should you grow? What about dividends?

If you’re an investor like me, you’ve probably asked yourself these questions. And if you’ve answered yes to really want growth, then you probably don’t want to put your money into more stocks like Apple or Exxon Mobile. I mean, you know the whole story of the market and what happened in October of 2008.

Hunting for Growth Stocks

Investors are no longer looking for dividend paying stocks. Now they want to find companies that are rapidly growing earnings and dividends. Many investors seek out growth stocks that may offer double digit returns. Due to 7 years of low interest rates and the Federal Reserve removing its boot from the neck of the economy, stock prices have soared to historically high levels.

Many investors are fearful of missing the next big bull market since the last bull has produced tremendous capital gains in their portfolios. If wealthy investors are not investing they will soon be poor investors. Hence the next market correction will be devastating for investors unprepared for the next great bear market.

Many investors are panting for a major correction that many of them think is overdue. They are hoping for a big drop in the stock market that will set them up for a great rebound. Investors are waiting for markets to free fall so they can pick up undervalued stocks. These stocks may later provide the investor a 10 even a quick 20+% return.

What is the basis to the thinking that stocks may decline if not go into a full fledged bear market. One case could be a yearly analysis of Mr. Market that shows every year the stock market declined. The average drop was 4.93% since 1900 in the S&P 500 and for an average drop of 3.67 percent per year in the Dow Jones Industrial Average. The key date to watch is the third year of the presidential cycle.

Add a Filter for Value Investments

The 4 and 13 Rules

Genuine Bargain situations are rare, but they do exist. They occur when something that is undervalued is parked in a harbor that is owned by a management team that is clueless and that cannot act because of the presence of activist investors.

In such situations, a savvy investor buys a slice of the business, and applies two dynamic strategies to it –¢ split management and¢ relaunch the business in an intelligent fashion.

However, when the business is down 50% as a result of neglect, it is hard to figure out what the better management team should do. Usually the investor isn’t hung about what does happen, but is more worried about how quickly he can exit.

If the business’s stock is down 50%, it means that the future value of the business is now a 50% discount to the current value. In such cases it seems that GARP offers a good strategy for the management team and the activist investors. For the inactive shareholder, it may be too fuzzy, so it may be best to concentrate on a cash flow strategy.

GARP is like the search for an ideal. It attempts to find a suitable company with a fair price and fair earnings, and growth potential. The difference is that its search is not for an ideal, but for something better than just an ideal.

Joined at the Hip

GARP Investing and Value Investing.

Both GARP and value investing take a objective approach to security valuation – selecting stocks based on what you believe they intrinsically are worth, independent of the market price. If you believe the market price of a security has the wrong fundamentals (i.e. the discounted cash flow is worth a lot more than the share price), then you might follow a value approach – buying it for less than it is worth. Conversely, if you believe the market price correctly reflects the fundamentals (i.e. the future cash flow is worth more than the share price), then you might follow a GARP approach – buying it for the prevailing market price. Each approach has its merits and can potentially produce superior results, depending on the individual stock.