What is GARP
GARP (Growth AT A Reasonable. Price), called "growth at a reasonable price" is a stock picking will be a combination of value and growth. GARP strategy to find that, relative to its earnings growth, undervalued and have reliable growth potential of the company. GARP's standard selection between value investing and growth investing method. The left chart shows the position compared to the value of law and law growth investors, GARP's preferred price and growth potential.
There is a misconception that, GARP users to maintain a value of just the same number of stocks and growth stock portfolio. Not so, GARP investors choose are those that neither pure value, not just have a stock growth characteristics, but taking into account both the comprehensive stock.
Who is the user of GARP?
Best at using GARP investor, is the famous fund manager Peter Lynch •. Lynch has written several popular books, including "The Wall Street outsmart technique" and "learning to make money." However, his legendary reputation thanks to more than 29% of the average annual income he received the 13-year period from 1977 to 1990. And he was able to achieve such excellent results, mostly from his grasp and application of the GARP.
GARP's integrated features
with the same growth investors, GARP also value the growth prospects of the company. But unlike other growth-oriented investor it is different, their high expected rate of return (for example, the range of 25% -50%) of the company will be cautious. Because such companies include greater risks and uncertainties. The users seem to GARP, a safe, more realistic growth rates of return (for example, 10% -20%), more suitable for their appetite.
GARP investors and growth investors is another common concern for ROE. For both styles of investors, a sustained high growth of ROE (relative to the industry average in terms of) often imply that this is a good company.
GARP investors and growth investors will use some other metrics of growth, but the ideal state for different indicators show out, they will have a different understanding, there will be differences of opinion on the company. For example, GARP investors like to see the cash flow or some other positive earnings momentum indicators.
Due to the large number of objective criteria to assess growth, GARP investors can play their own initiative, to develop their own stock picking system in line with personal style. Initiative is one of the elements necessary for the use of GARP, because if you want to use this strategy, you have to analyze a company based on a unique background (as if you're doing the same growth investments), the company must follow their own performance and understand the operations to make decisions.
If you do not mention the use of earnings, it is difficult to discuss stock-picking strategy. Although compared to the value investors, GARP investors tend to choose a higher price-earnings ratio of stocks, but they are still very cautious on high earnings. A growth investors might use 50 or 60 times earnings to buy a company, GARP investors will think this investment due to uncertainty paid a high price. They are more inclined to company earnings in the range of 15-25. However, this is only a rough estimate, not a hard and fast investment principles.
In addition to tend to lower the price-earnings ratio, GARP investors and value investors like as low book value of the company, especially below the industry average book value of the company. Low price-earnings ratio and book value is the value of the investment and two similar investment criteria. They may use some other similar or different standards, but the main idea is to focus on the current value.
We probably already know what GARP investment, so now let's dig a number of indicators that can be used to help identify potential target company:
at The PEG Ratio - price-earnings ratio relative to earnings growth index
PEG indicators GARP investors may be the most important metric because it measures to maintain a balance between the force and the value of the stock of potential growth. GARP investor demand for no more than 1 PEG is, in most cases, this value is close to 0.5. PEG is less than an implied, with respect to earnings growth at this stage of the stock price lower than its rightful place. That stock is lower than it should actually valuable and worthy of attention.
The actual use of PEG
's assume we have a company, its stock is trading at 19 times earnings when and earnings growth of 30%. Then you can calculate the company's PEG of 0.63 (19/30 = 0.63), according to GARP standards point of view, this is a good number.
Let us assume that in addition there is a B company, its stock was 11 times earnings, and earnings growth of 20%. It PEG equal to 0.55 million. GARP investors might be interested in a company, but Company B will look more attractive. Although Company B's earnings growth is relatively low compared with a company, but it is now there is a good price so that it has a better appreciation potential. So as you can see, GARP investors seek a certain growth rate, but also requires that the growth rate is based on reasonable prices.
Because GARP strategy using principles from growth and value investing, the GARP investor rate of return in a particular stage of the market, there will always be differences in type and value and growth investing. For example, when the market is in a bull market, growth-oriented strategy is often unable to overcome, but when the transition to a market-style occur, GARP investors suffered losses will be less than growth investors.
So, GARP strategy not only blend of growth and value-based stock selection criteria, as well as both the rate of return characteristics of a combination of these two styles: in a bear market, a value investor will do better in a bull market, growth investors will do better than expected, while a GARP investor will be sustained, predictable returns obtained.
GARP strategy sounds perfect, but the growth and value investing used in combination, was not an easy thing. However, this is indeed a worthy skill we take the time to learn.
Further Reading:
1. a quantitative strategist Confessions (Good text strongly recommended)
2. classic quantitative trading strategies available in the market are here! (Source)
3. futures / stock data Daquan query (History / real-time / Tick / finance, etc.)
5. From the high-frequency trading to quantify, can not read five books
6. HFT four factions Big Secret
