What Is Growth at a Reasonable Price (GARP)?
GARP is an equity selection style that blends growth investing’s emphasis on above‑market earnings expansion with value investing’s discipline on price. GARP investors seek companies growing earnings faster than the market but trade at valuations that are not excessive — typically measured with the PEG ratio (price/earnings divided by expected earnings growth). The goal is to avoid overpaying for growth while still capturing growth tailwinds.
Key takeaways
– GARP targets companies with above‑market earnings growth but reasonable valuations.
– The PEG ratio is the core quick screen: a PEG ≈ 1 (or less) is commonly used as a GARP threshold.
– GARP typically sits between pure growth and pure value in terms of risk/return profile.
– You can implement GARP by selecting individual stocks using fundamental screens or via GARP‑oriented ETFs (for example, Invesco’s S&P 500 GARP ETF that tracks S&P’s GARP index).
– Limitations: PEG depends on earnings growth estimates (which can be wrong) and doesn’t capture all risks (debt, cash flow quality, cyclicality, accounting issues).
How GARP investing works
1. Identify above‑market growth. Look for companies with consistent, sustainable earnings growth rates that exceed broad market averages. Use multi‑year trends (3–5 years) and analyst forward growth estimates to gauge sustainability.
2. Measure valuation relative to growth. The PEG ratio = P/E ÷ expected earnings growth rate (expressed in percent). Example:
– P/E = 20, expected EPS growth = 20% → PEG = 20 ÷ 20 = 1.0 (generally acceptable to a GARP investor).
– P/E = 20, expected EPS growth = 15% → PEG = 20 ÷ 15 = 1.33 (likely too expensive for GARP).
3. Screen for “reasonable” valuation cutoffs. Common GARP screens use PEG ≤ 1.0 (or ≤ 1.2 in some implementations), combined with a cap on absolute P/E (for example P/E < 25–30) to avoid runaway valuations.
4. Confirm fundamentals beyond PEG. Check profitability (ROE, margins), cash flow (free cash flow yield), balance sheet strength (debt levels), and business quality (moat, competitive position). Validate that expected growth is realistic and not the result of one‑off items or accounting quirks.
5. Monitor and rebalance. Reassess growth outlook and valuation over time; sell when valuation rises far above justified levels or growth slows materially.
Comparing GARP and value investing strategies
– Philosophy:
– Value: Buy stocks trading below intrinsic value, emphasizing margin of safety.
– GARP: Buy companies with solid growth prospects at reasonable prices; a middle ground.
– Typical targets:
– Value: Low P/E, low price/book, distressed or out‑of‑favor companies.
– GARP: Growth companies with moderate P/E relative to growth (low PEG).
– Performance tendencies:
– In bull markets, pure growth may outperform GARP; in severe downturns, strict value stocks bought at steep discounts may fare better.
– GARP seeks a balance — better downside protection than high‑multiple growth stocks, with more upside than deep‑value bargains that lack growth.
– Metrics emphasized:
– Value: DCF/intrinsic value, P/E, price/book, margin of safety.
– GARP: PEG foremost, plus growth consistency metrics, cash flow, and leverage.
Implementing GARP in your portfolio — practical steps
1. Define your investment objective and time horizon.
– GARP suits investors seeking growth but who want valuation discipline. It’s typically a multi‑year strategy.
2. Set screening criteria (example starter screen).
– Minimum historical/expected earnings growth: ≥ 10–15% annual.
– PEG ratio: ≤ 1.0 (or ≤ 1.2 depending on strictness).
– P/E (trailing or forward): 2), sustained earnings misses, or deterioration in balance sheet.
– Rebalance periodically to maintain target exposures and capture gains.
7. Consider passive GARP exposure.
– If you prefer not to pick stocks, use an ETF that follows a GARP index — for example, the Invesco S&P 500 GARP ETF (ticker: SPGP) tracks S&P’s GARP index, providing diversified exposure to qualified large‑cap GARP names with an expense ratio (check current fund documents for up‑to‑date fees and holdings).
Practical examples and calculations
– PEG calculation: PEG = (Price per share ÷ Earnings per share) ÷ (Expected annual EPS growth %).
– Company A: P/E = 16, expected growth = 20% → PEG = 16 ÷ 20 = 0.8 → GARP candidate.
– Company B: P/E = 30, expected growth = 25% → PEG = 30 ÷ 25 = 1.2 → may be borderline/too rich depending on other factors.
Key risks, caveats, and limitations
– Reliance on growth estimates: PEG uses expected growth, which can be overly optimistic or revised downward.
– Growth quality: High accounting or one‑time items can inflate reported earnings; prefer cash flow confirmation.
– Sector bias: Growth sectors (tech, healthcare) may dominate GARP screens; ensure sector diversification.
– Interest rates and macro: Rising rates can compress valuations for growthier names even if PEG looks reasonable.
– PEG is an imperfect single metric: combine with other valuation and fundamental checks.
Resources and further reading
– Investopedia — “Growth at a Reasonable Price (GARP)” (overview and examples).
– CFA Institute — “GARP Investing: Golden or Garbage?” (discussion of merits and limitations).
– S&P Global — S&P 500 GARP Index (index methodology and selection criteria).
– Invesco — Invesco S&P 500 GARP ETF (SPGP) fund information and holdings.
Sources
– Investopedia. “Growth at a Reasonable Price (GARP).” https://www.investopedia.com/terms/g/garp.asp
– CFA Institute. “GARP Investing: Golden or Garbage?” (article)
– S&P Global. “S&P 500 GARP Index.” (index methodology)
– Invesco Distributors, Inc. “Invesco S&P 500 GARP ETF.” https://www.invesco.com
– Invesco Distributors, Inc. “Invesco S&P 500 GARP ETF, Fund Holdings.” (holdings document)
If you’d like, I can:
– Build a sample GARP stock screener you can run in a particular platform (Yahoo Finance, Seeking Alpha, your broker), or
– Scan a sample basket of stocks and show which meet a chosen PEG/P/E/CF screen today.