what is Growth at a Reasonable Price (GARP)

Growth at a Reasonable Price (GARP) is an investment strategy that combines the principles of growth and value investing to identify stocks that offer strong growth potential at a reasonable valuation. This approach aims to balance the potential for high earnings growth with the avoidance of overpaying for stocks. Here's how GARP investing works: 1. **Core Principles**: - GARP investors seek companies with consistent earnings growth above market levels. - They avoid stocks with very high valuations, focusing on those with relatively low P/E multiples. - The strategy aims to find a balance between the growth-oriented approach of pure growth investing and the value-oriented approach of strict value investing. 2. **Popularization and Implementation**: - GARP investing was popularized by Peter Lynch, who used it to select stocks for the Fidelity Magellan Fund in the 1980s. - Today, investors can implement GARP strategies through actively managed funds or passive index funds, such as the S&P 500 GARP Index. 3. **Key Characteristics**: - GARP investors often look for stocks in sectors like technology, energy, and healthcare, which can offer both growth and value opportunities. - Stocks that meet GARP criteria typically have a P/E to earnings-to-growth (PEG) ratio of 1 or less, indicating reasonable valuations relative to growth expectations. 4. **Performance Expectations**: - In normal market conditions, GARP investors can expect returns that are higher than those of pure growth investors but lower than those of strict value investors. - During bear markets or downturns, GARP returns may be more robust than those of pure growth investors, who are more exposed to high-valued growth stocks. 5. **Sector Focus**: - GARP investors focus on sectors with strong growth potential, such as technology and consumer discretionary, which often have companies with sustainable competitive advantages. By combining the best of both growth and value investing, GARP offers a strategy that aims to maximize returns while minimizing the risks associated with overpaying for growth stocks or underperforming value stocks.