While most investors even consider themselves growth or value investors, there are certain stocks that meet both criteria. In this article, we will determine whether a stock can be both a value and growth, and how to identify value growth stocks.
Can a stock be considered value and growth at the same time?
Although stocks are usually either considered growth or value, there are certain stocks that can fall under both categories. There is also another term for these stocks, which is GARP (growth at a reasonable price). While it may seem like investors must choose a certain investment style and stick to it, GARP stocks offer the best of both worlds.
What are the advantages of investing in GARP stocks?
GARP stocks offer investors the ability to buy growth companies at a reasonable valuation. A GARP stock can present earnings growth at an attractive valuation. It helps an investor diversify their portfolio, especially if he generally invests in either growth or value stocks.
How a stock can be both value and growth
When a growth stock does not meet its estimates or has a lower growth than expected it is normal for the market to react, and the stock usually declines. This presents an opportunity for investors, who might be looking to invest in growth stocks but are not willing to buy them if they are overvalued.
In some cases, the stock can have a quarter or two of underperformance due to external causes, and it can continue to grow over the long term.
A stock may also be considered GARP if the company ends up growing at a faster rate than what the market or analysts expect. Investors with insights into an industry or the company or insights are able to detect these stocks and profit from them.
Finally, there are also companies whose future growth is not fully priced into the stock’s valuation. In these cases, the market expects the company to grow but the expectations may be too conservative.
How to find GARP stocks
The most common stock metric used to find GARP stocks is the PEG ratio (price/earnings-to-growth ratio). The PEG ratio is calculated by dividing the price-to-earnings by the earnings growth.
PEG ratio = P/E / Earnings Growth
What is a good PEG ratio for GARP stocks?
Traditionally a PEG ratio under 1 indicates that a stock is undervalued, and therefore it should be considered. Additionally, a PEG ratio over 1 means that the stock is probably overvalued. Typically the lower the PEG ratio the more undervalued the stock is.
Finding GARP stocks
There are a few different ways of finding the right GARP stocks to invest in:
ETFs and Index
One of the simplest ways to find stocks that are a mix of both growth and value is to look at ETFs following this strategy. One of the most popular is the Invesco S&P 500 GARP ETF, and if you analyze the holdings of the ETF you will find plenty of growth stocks at attractive valuations.
You can also find these stocks if you look through the stocks included in the S&P 500 GARP Index which tracks growing companies at an attractive valuation.
Stock screener
Using a stock screener allows investors to identify stocks they want to research or invest in. One of the most powerful stock screeners available to investors is Stock Rover, which allows you to screen through thousands of different stocks. You can try it for free here.
Finding low PEG stocks
The simplest way to find stocks with a low PEG ratio is by using a stock screener which allows investors to filter stocks based on different metrics. You can screen for stocks with a PEG ratio under 1 and compare different metrics to determine whether or not the stock is actually undervalued or growing.
You should be aware that although stocks with a low price/earnings-to-growth ratio are attractive in some cases, the current earnings or the expected income growth might be overstated. For that reason, it is crucial to research the company.
Growing companies at attractive valuations
You can also find growing companies at attractive valuations without necessarily using the PEG ratio. One of the best ways to do this is to screen for stocks with earnings growth and with a low price-to-earnings and a low price-to-book.
Similar to low PEG stocks, it is imperative that investors look through the company’s financials to assess whether the low price-to-earnings and price-to-book represent undervaluation, or if there are other risks associated with the stock.
Example of GARP stocks
Currently, there are two stocks that stand out as interesting GARP stocks: Alibaba, and Facebook. Both companies are now trading at an attractive valuation relative to their past and expected growth.
Facebook currently trades at a price-to-earnings under 13, and despite having a high PEG ratio of over 2, the company might surprise analysts over the long term as it continues to grow.
Alibaba is a different case, the stock currently has a P/E ratio of 30, but its PEG ratio is under 1, at around 0.8.
Conclusion
While growth and value tend to be contradictory strategies, there are advantages to using both of these investing styles to find stocks. This approach allows investors to diversify their portfolios while investing in companies whose earnings are expected to rise, but without overpaying for the stock.