GARP

An investing strategy that identifies growth stocks trading at sensible valuations, blending growth and value investing.

Growth At a Reasonable Price (GARP) is an equity investment strategy that seeks to identify companies showing consistent earnings growth, but whose stock prices are not excessively expensive relative to that growth. It represents a hybrid approach, bridging the gap between pure growth investing and pure value investing. Unlike pure value investors who look for cheap stocks regardless of growth, or pure growth investors who may buy high-growth companies at almost any valuation, GARP investors look for a middle ground. They typically avoid companies with extremely high price-to-earnings (P/E) ratios, even if the growth prospects are strong, and instead focus on sustainable growth at a sensible price. Investors often use the PEG ratio (Price/Earnings-to-Growth) to identify GARP opportunities, looking for companies with PEG ratios close to or below 1.0, which suggests the stock's valuation is well-aligned with its projected growth rate. A common pitfall is relying on unrealistic future growth projections, which can make a stock look like a GARP opportunity when it is actually overvalued.

Company A has a P/E ratio of 18x and is projected to grow its earnings per share by 15% annually over the next five years. To find out if it fits a GARP strategy, we calculate its PEG ratio: 18 / 15 = 1.2. Because the PEG ratio is close to 1.0, a GARP investor would consider this stock reasonably priced for its growth rate.