GARP INVESTING
Overview
Growth At a Reasonable Price blends the best of value and growth investing. You seek companies growing earnings 15-25% annually but trading at PEG ratios below 1.5 — not cheap by traditional value standards, but not the extreme valuations of pure growth stocks either.
Setup
- 1.Screen for companies with 15-25% earnings growth over the last 3 years and analyst estimates for continued growth.
- 2.Calculate the PEG ratio (P/E ÷ Growth Rate) — target PEG between 0.5 and 1.5.
- 3.Confirm strong operating margins and return on equity (ROE > 15%).
- 4.Look for a durable competitive advantage (brand, network effect, switching costs, patents).
- 5.Size positions conservatively — GARP stocks still trade at growth multiples and can fall 30-40% in corrections.
Max profit
Compounding earnings growth eventually forces the stock price higher. GARP stocks that sustain 20% earnings growth for 5 years can triple or more.
Max loss
If earnings growth disappoints, the multiple compresses and the stock falls hard — double hit of lower earnings + lower P/E.
Breakeven
Purchase price; valuation support helps limit downside vs. pure momentum growth stocks.
When to use
In any market environment — GARP holds up better in corrections than high-multiple growth and outperforms value in expansions.
When to avoid
Don't overpay — if PEG exceeds 2.0, you've crossed from GARP into pure growth territory with all its risks.