Building a Case for Mega-Cap Stocks
A third investment strategy is GARP. (Growth Investments at Reasonable Prices)
There is another hybrid strategy that investors use to choose stocks. This is a combination of value and growth investing. By looking for stocks that are undervalued but have sustainable growth projections investors can get the best of value and growth investment strategies.
The GARP investment strategy seeks growth company prospects with positive earnings numbers for the past few years. Coupled with positive earnings projections of 10-20 percent for upcoming years. Both GARP and growth investors focus their attention on the ROE (Return on equity rate) figure. A high and increasing ROE relative to the industry average is an indication of a superior company. ROEs between 15 and 20 percent are considered good. Investors ideally like to see positive cash flows well as positive earnings momentum.
GARP investors look for companies in the 15 to 25P/E ratios. In addition to this, GARP investor shares the value investor’s attraction to a low price to book ratio (P/B) that are below industry average as they are concerned about present valuations.
The PEG ratio is calculated by taking the P/E ratio and dividing it by the growth earning rate. GARP investors consider the PEG ratio one of the most important criteria in choosing stocks as it essentially gauges the balance between a stock’s growth rate and its current value.
Investors require a PEG of 1 or less.0.5 being an ideal PEG ratio. A PEG of less than 1 means that the stock’s price is trading below fair market value given its earnings growth rate.
Read more >>
Top GARP Stocks 11-13-12 MPC AFL CTB