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Investing Strategies: GARP Investing Comments

Amy Tailor   |   April 22, 2008
We have already introduced to our readers the strategies of value investing (investing in undervalued companies) and growth investing (investing in potentially aggressive companies). This article will discuss another investment strategy, a so-called GARP investing, also known as Growth At a Reasonable Price. GARP investors look for companies that demonstrate a better than average growth but not overpriced at the same time.

GARP investing was popularized by the legendary Peter Lynch, who used to manage Fidelity Investments. This fact indicates that the strategy is at least worth paying attention to. Experts calculated that GARP investors get higher returns than pure growth investors during the bear market, though lower returns than value investors.

The experts drew this conclusion based on the PEG ratio, one of the key fundamentals for the GARP investing. Investors might pick and screen stocks in various ways, but price/earnings growth (PEG) is the most important factor. It shows the correlation between a P/E ratio (company�s valuation) and expected earnings growth over the next several years. GARP investors invest in companies with PEG ratio 1 or less, which means that the P/E is keeping pace with the expected earnings growth. At the same time, such ratio helps finding companies whose stocks are traded at reasonable price.

Among other important fundamentals, GARP investors use growth perspectives and intrinsic value of the company. Growth related information can be found either on the company�s website or almost any financial websites like http://finance.yahoo.com.

You should also be aware of the major mistake GARP investors make � investing in stocks of rapid growth with high P/E. In most cases such P/E indicates that there is a higher profit growth than present income level. It means that almost inevitably, the stock price will eventually go down or remain on the same level, expecting the P/E to pick it up.

It is not easy to invest in both growth and value. If you don�t know the two strategies well enough, you will tend to buy mediocre stocks instead of GARPs. Also, GARP investing might depend significantly on the current market state. For instance, in the late 1990s people were so much into tech and dotcom stocks that it involved some traditional companies as well and increased their stock price, although companies did not undergo any changes.

So make sure you remember the following points about GARP investing:

  1. GARP investing is a strategy that involves a combination of investing principles of growth and value investment strategies.
  2. Avoid buying stocks on the both poles of the spectrum, i.e. both soaring and significantly undervalued stocks.
  3. PEG ratio, one of the key instruments used by GARP investors, should be less that 1 for your target GARP companies.
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