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GARP investors select companies with growth rates in their financial metrics (sales, operating income, net income, profit cash flow, etc.).operating income, net income, cash profit, etc.) above the market average, but exclude companies whose valuations are too high.
This investment style was popularized by Peter Lynch, renowned fund manager of the Fidelity Magellan Fund for 13 years, where he achieved an impressive average annual return of 29.2%. He also popularized the PEG (price-earnings to growth) valuation ratio, which divides the PER (price to earnings) by the rate of earnings growth over the period under consideration. According to this ratio, a company can be considered correctly valued at 1, undervalued if the ratio is below 1, and overvalued if the ratio is above 1. In reality, a simple ratio cannot value a company in its entirety, but it does have the advantage of providing more nuance than a simple PER.
If we look at long-term performance (since 1995, for example), we can see that the S&P 500 GARP beats the S&P 500 Growth, S&P 500 Value and even the S&P 500 indices.
To benefit from the performance of this investment style, we have created a list accessible to all our customers. This list features GARP stocks of the moment, according to our quantitative criteria. Companies of sufficient size (market capitalization) and liquidity that meet criteria relating to sales and earnings per share (EPS) growth over the medium and long term, based on past data as well as estimates for the future, are selected.
Next, a valuation filter is applied to select only those companies that are reasonably priced. The valuation filter classifies companies according to how expensive they are, by comparing their capitalization and/or enterprise value (EV) with sales (EV/Sales), operating income (EV/EBIT), net income (P/E) and free cash flow (P/FCF) to select only the least expensive.
Several geographical zones are proposed. The global list includes companies listed on the world's main financial markets. The other lists are regional: North America (USA, Canada), Europe, Asia (Japan, Australia, Singapore, Hong Kong), Emerging Markets, UK, France, Germany, Switzerland, Netherlands and Italy.
