There are two kinds of investing approaches followed by investors in general – value investing and growth investing. Value investing is where undervalued stocks are identified, and the investment is made with the assumption that the stocks to buy will reach its fair value. Growth investing attempts to identify the stocks with higher growth prospects at a very lucrative rate.
Growth at a Reasonable Price (GARP) stocks are the stocks that are identified combining both these investment approaches. These stocks show a consistent earnings ratio but do not have high valuations.
GARP stock screener
A GARP stock screener aims to identify stocks that have a higher earnings ratio when compared to the market but the valuation of the stocks is comparatively lower. This strategy rationale lies in achieving the best of both the philosophies.
Screening criteria
- P/E Ratio: Price per share divided by earnings per share gives the P/E ratio. This ratio aims to determine the market value of a share.
- Earnings per share forecast: This is an estimated earning that a share can achieve in the upcoming period.
- PEG Ratio: A Price/Earnings to Growth (PEG) ratio is arrived at by dividing the PE ratio by projected earnings. This ratio aims to determine the true valuation of the stock. A PEG ratio of less than one implies that the stock is undervalued. Suppose the price per share of company X is at Rs. 100, EPS is Rs. 10, and projected earning is estimated at 18%. P/E Ratio here will be 100/10= 10. Therefore, PEG Ratio will be 10/18=0.56. Here we have seen that the P/E ratio is lucrative and so is the PEG ratio. This makes the stock a good fit for being considered as a GARP stock.
GARP stocks 2021
- Bajaj Healthcare: A company in pharmaceuticals since 1993, with a global reach. The stock fits various parameters of GARP stocks. In the current scenario, it is a reputed player in healthcare with a PEG ratio of 0.26, thus a good stock to hold in your portfolio.
- Finolex Industries: A prominent player in India PVC pipes and fittings space. The financials of the company are decent and fulfil the screening criteria of GARP stock. The PEG ratio of the stock stands at 0.67.
- ION Exchange: Again, an attractive PEG ratio of 0.47. The company deals in water treatment and recycle.
- Coromandel International Ltd: A leading agri solutions provider. It is a part of Murugappa Group, which has presence across various industries such as auto components, abrasives, financial services, transmission systems, cycles, sugars, farm inputs, fertilisers, plantations, etc.
- Jindal Poly Film: A flexible packing industry company, with a PEG ratio of 0.26. It’s a company that was founded in 1985.
Conclusion
GARP stocks can be a good fit for your portfolio, given that you understand the inherent logic behind including such stocks. There are even some GARP mutual funds that follow the same logic. GARP stocks help you to manage the pitfalls of value investing and growth investing by finding a common ground between the two.
