Growth at a Reasonable Price (GARP) Investing
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Growth at a Reasonable Price (GARP) investing is a popular type of equity investing strategy that gained the attention of investors in the 1980's. The style currently remains popular today with investors as companies that can deliver earnings growth are rewarded in a low growth economic environment.
The GARP strategy involves a combination of utilizing the best characteristics of both equity disciplines - growth style metric investing as well as value type techniques. Many investors would consider GARP style investing as a extension the classic value type investing of low P/E (price to earnings) and low P/B (price to book) ratio companies. It is viewed as an extension since the investor who is valuing the company wants it more inexpensively by gaining as much earnings growth as possible for as low a P/E as possible. The largest philosophical difference between GARP and classic value investing are how investors value and analyze these companies. The GARP style of investing revolves primarily around the analysis of the PEG ratio. PEG stands for Price / Earnings to Long Term Earnings growth. An attractive PEG ratio is one where the long term earnings are in line with the P/E ratio which then demonstrates that an investor is receiving good value and not overpaying for the security. With the PEG ratio, the P/E ratio is less important and most investors will consider a higher P/E ratio in order to capture a high earnings growth rate. Likewise, the ideal earnings growth rate in an analysis of a PEG ratio is usually in the 10 to 20% range as usually once a company goes beyond 20 % in their earnings growth rate, the corresponding P/E ratio rises significantly as now that investment is considered to be in the growth universe, where stocks are accorded a higher P/E multiple. For a PEG investing situation, an overall a PEG ratio of 1 or less represents good value with the P/E and earnings growth rate in line with each other.
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