GARP-y Stocks to Crush the Market

As if investing wasn’t challenging enough, the basic investing strategies have risks of their own. For growth investors, the risk is that the growth fails to materialize and the high multiple comes crashing down to earth a la JetBlue (Nasdaq: JBLU  ) . For value investors, the risk is that business conditions deteriorate even more, causing earnings and multiples to contract even further, a la General Motors (NYSE: GM  ) .    

Is there a middle way? Well, yes, and it goes by the funny acronym of GARP, or "Growth At a Reasonable Price." GARP devotees attempt to find companies growing faster than their quoted price gives them credit for. Legendary investor Peter Lynch is the poster-person of the GARP universe, and his record at Magellan was extraordinary. 

GARP investing combines the best of both worlds: the earnings growth of growth investing with the conservatism and discipline of value investing, in the hopes of avoiding the extreme outcomes commonplace in the two basic strategies.   

How would you search for GARP-y stocks? Well, at its simplest, look for stocks with high earnings growth rates trading at low price-to-earnings ratios. 

I did just that using the brilliant screening tool in CAPS, The Motley Fool’s interactive stock-rating database of more than 115,000 members.

I searched for:

  • Last three year's average EPS growth rate above 20%.
  • Price to earnings under 15 times.
  • Price to book value under 2 times.
  • At least 500 "outperform" picks.

And voila, five companies making the list:

Company Name

Current CAPS Rating (5 max)

Outperform Picks

Underperform Picks

EPS Growth Rate (last 3 yrs)

Price-to-Earnings (TTM)

Price-to-Book (TTM)

ICO (Nasdaq: ICOC  )

*****

860

14

78%

6.5

1.27

Perficient (Nasdaq: PRFT  )

*****

559

17

27%

11.7

1.12

Pride International (NYSE: PDE  )

*****

590

8

148%

4.6

1.09

Rowan Companies (NYSE: RDC  )

*****

581

15

47%

5.9

1.12

Western Digital Corp. (NYSE: WDC  )

****

807

43

60%

4.9

1.54

Source: Motley Fool CAPS, as of Oct. 6, 2008. TTM = trailing 12 months.

Feel free to head over to CAPS to screen for more GARP stocks or to check out what CAPS members have to say about the stocks you own.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool analyst Andrew Sullivan likes GARP investing and does not have a financial position in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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