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In the equity market, investments must be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question often arises is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in extreme market instability. The investing track of Warren Buffett over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
Several stocks that have surged significantly in recent times show the overwhelming success of this hybrid investing strategy over pure-play value and growth investments.
Here, we will discuss the success of four stocks that have trended high based on GARP investing. These include Sirius XM Holdings (SIRI - Free Report) , Carnival (CCL - Free Report) , JD.com (JD - Free Report) and Abercrombie & Fitch (ANF - Free Report) .
More on GARP
The GARP theory, while mixing the growth and value-investing principles, gives us a hybrid strategy showing whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
PEG Ratio at a Glance
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates the stocks’ P/E ratio with the future earnings growth rates.
While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say, for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio indicating both undervaluation and future growth potential.
Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio, though. It does not consider the very common situation of changing growth rates, such as the forecast of the first three years at a very high growth rate, followed by a sustainable but lower growth rate over the long term.
Hence, PEG-based investing can be even more rewarding if some other relevant parameters are also taken into consideration.
Zacks Screening Criteria
Here are the screening criteria for a winning strategy:
PEG Ratio less than X Industry Median
P/E Ratio (using F1) less than X Industry Median (For more accurate valuation purpose)
Zacks Rank of 1 (Strong Buy) or 2 (Buy) (Whether good market conditions or bad, stocks with a Zacks Rank #1 or #2 have a proven history of success.)
Market Capitalization greater than $1 Billion (This helps us to focus on companies that have strong liquidity.)
Average 20-day Volume greater than 50,000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change F1 Earnings Estimate Revisions (4 Weeks) greater than 5%: Upward estimate revisions add to the optimism, suggesting further bullishness.
Value Score of less than or equal to B: Our research shows that stocks with a Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.
Our Picks
Here are the four stocks that qualified the screening:
Sirius XM: Headquartered in New York, Sirius XM is a radio broadcasting company that creates and broadcasts a variety of content such as commercial-free music, premier sports and live events, news and comedy and exclusive talk and entertainment shows, providing its services in the United States and Canada.
SIRI stock can also be an impressive GARP investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, Sirius XM also has a solid long-term expected growth rate of 10%.
Carnival: Headquartered in Miami, FL, Carnival operates as a cruise and vacation company. As a single economic entity, Carnival Corporation & Carnival plc is the largest cruise operator in the world. It is the world’s leading leisure travel firm and carries nearly half of the global cruise guests. The company operates in North America, Australia, Europe and Asia.
JD.com: The company operates as a supply chain-based technology and service provider in the People's Republic of China. The company offers computers, communication, and consumer electronics products, as well as home appliances; and general merchandise products comprising food, beverage and fresh produce, baby and maternity products, furniture and household goods, cosmetics and other personal care items, pharmaceutical and healthcare products, industrial products, books, automobile accessories, apparel and footwear, bags, and jewelry.
JD carries a Zacks Rank of 1 and has a Value Score of A. JD.com has an impressive long-term historical growth rate of 63.5%.
Abercrombie: The company operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids through a network of approximately 757 stores across North America, Europe, Asia and the Middle East, as well as the e-commerce sites www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com, www.gillyhicks.com and www.socialtourist.com.
Abercrombie's product portfolio includes knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids, under the Abercrombie & Fitch, abercrombie kids and Hollister brands.
ANF can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has a solid long-term historical growth rate of 47.9%.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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4 Best GARP Stocks With Discounted PEG to Buy
In the equity market, investments must be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question often arises is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in extreme market instability. The investing track of Warren Buffett over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
Several stocks that have surged significantly in recent times show the overwhelming success of this hybrid investing strategy over pure-play value and growth investments.
Here, we will discuss the success of four stocks that have trended high based on GARP investing. These include Sirius XM Holdings (SIRI - Free Report) , Carnival (CCL - Free Report) , JD.com (JD - Free Report) and Abercrombie & Fitch (ANF - Free Report) .
More on GARP
The GARP theory, while mixing the growth and value-investing principles, gives us a hybrid strategy showing whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
PEG Ratio at a Glance
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates the stocks’ P/E ratio with the future earnings growth rates.
While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say, for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio indicating both undervaluation and future growth potential.
Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio, though. It does not consider the very common situation of changing growth rates, such as the forecast of the first three years at a very high growth rate, followed by a sustainable but lower growth rate over the long term.
Hence, PEG-based investing can be even more rewarding if some other relevant parameters are also taken into consideration.
Zacks Screening Criteria
Here are the screening criteria for a winning strategy:
PEG Ratio less than X Industry Median
P/E Ratio (using F1) less than X Industry Median (For more accurate valuation purpose)
Zacks Rank of 1 (Strong Buy) or 2 (Buy) (Whether good market conditions or bad, stocks with a Zacks Rank #1 or #2 have a proven history of success.)
Market Capitalization greater than $1 Billion (This helps us to focus on companies that have strong liquidity.)
Average 20-day Volume greater than 50,000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change F1 Earnings Estimate Revisions (4 Weeks) greater than 5%: Upward estimate revisions add to the optimism, suggesting further bullishness.
Value Score of less than or equal to B: Our research shows that stocks with a Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.
Our Picks
Here are the four stocks that qualified the screening:
Sirius XM: Headquartered in New York, Sirius XM is a radio broadcasting company that creates and broadcasts a variety of content such as commercial-free music, premier sports and live events, news and comedy and exclusive talk and entertainment shows, providing its services in the United States and Canada.
SIRI stock can also be an impressive GARP investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, Sirius XM also has a solid long-term expected growth rate of 10%.
Carnival: Headquartered in Miami, FL, Carnival operates as a cruise and vacation company. As a single economic entity, Carnival Corporation & Carnival plc is the largest cruise operator in the world. It is the world’s leading leisure travel firm and carries nearly half of the global cruise guests. The company operates in North America, Australia, Europe and Asia.
CCL has an impressive revenue growth rate of 16.4% for 2024. The stock currently has a Value Score of A and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
JD.com: The company operates as a supply chain-based technology and service provider in the People's Republic of China. The company offers computers, communication, and consumer electronics products, as well as home appliances; and general merchandise products comprising food, beverage and fresh produce, baby and maternity products, furniture and household goods, cosmetics and other personal care items, pharmaceutical and healthcare products, industrial products, books, automobile accessories, apparel and footwear, bags, and jewelry.
JD carries a Zacks Rank of 1 and has a Value Score of A. JD.com has an impressive long-term historical growth rate of 63.5%.
Abercrombie: The company operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids through a network of approximately 757 stores across North America, Europe, Asia and the Middle East, as well as the e-commerce sites www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com, www.gillyhicks.com and www.socialtourist.com.
Abercrombie's product portfolio includes knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids, under the Abercrombie & Fitch, abercrombie kids and Hollister brands.
ANF can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has a solid long-term historical growth rate of 47.9%.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report