The Motley Fool

What Is: GARP Investing

GARP may sound more like someone with a bad case of indigestion than an investing discipline. But fundamentally, it is about looking for reasonably-priced shares that can also deliver growth. Some might say it is the Holy Grail of investing. After all, can it be possible to find inexpensive shares that can grow too?

Investors following GARP think they can. GARP comes from the English “Growth at a Reasonable Price,” or, in German “Growth at a Reasonable Price.”

These investors believe that it is possible capture the best parts of value and growth investing, while avoiding the worst pitfalls of each. They do this by combining the valuation of a share, namely the price-to-earnings (P/E) ratio, with the rate at which earnings are growing — multiplied by 100 — to arrive at a single number known as the price-to-earnings growth (PEG) ratio.

So, if you have a share with a P/E of 10 and earnings are growing at 10% a year, then the PEG, or the P/E growth ratio, would be one (10 divided by 10% * 100). If the shares were growing at 20% a year, then it would have a PEG ratio of 0.5 (10 divided by 20% * 100). But if the shares were only expected to only grow at 5% a year, then the PEG ratio would be two (10 divided by 5% * 100).

While there are no hard-and-fast rules governing GARP, fans of this style of investing are wary of fast growth rates and excessive valuations. Consequently, GARP investors are unlikely to invest in companies that are growing at more than 15% a year. That’s because they are looking for sustainable growth achieved over a number of years.

They are also wary of overly expensive shares and shares that are too cheap. So, you are unlikely to find GARP investors fishing in a pond where the P/E ratios are in the 30s and 40s. At the other end of spectrum, GARP investors are unlikely to be interested in shares with a P/E of less than 10.

Ideally, GARP investors are looking for a PEG ratio of less than one. A PEG of one would indicate fair value. Anything less than one could suggest growth at a reasonable price and might merit further investigation.