Tag: growth investing

  • What is GARP And GARP Investing?

    What is GARP And GARP Investing?

    What is GARP And GARP Investing?
    The definition of GARP stock can vary but is based on the P/E to PEG ratio, which divides the P/E ratio by the growth rate.

    What is  GARP or longer, Growth At a Reasonable Price? Growth at a reasonable price or short GARP is an investment strategy. This strategy unites the principles of both growth and value investing. How does it do that?  When you find the companies that have consistent earnings growth but don’t sell at too high valuations. This term was introduced by investor Peter Lynch.  

    While combining principles of growth investing and value investing it serves traders to pick individual stocks. GARP investors look for companies with steady earnings growth that is higher than market levels. That means they are eliminating companies that have very high valuations. The general goal is to avoid the extremes in any type, growth, and value investing.

    GARP investors invest in growth stocks but such that have multiples low price/earnings (P/E) in average market conditions.

    What is GARP Investing?

    GARP investing or growth at a reasonable price is a combination of value and growth investing, as we said. GARP investors seek companies that are slightly undervalued but with sustainable growth potential. Their criteria are almost the mixture of those that the value and growth investors use. Stable earnings growth is still on top position as one of the most important features but also valuation has a great influence on whether they pick a particular stock or not.

    Building such a portfolio that consists of “Growth At a Reasonable Price stock” isn’t just picking the stocks with an equivalent amount of growth and value. The point is to choose the stock that each has qualities of both, value and growth.

    Aggressive growth investors never pay too much attention to the value of the stock. Here are some reasons why they should consider the value of the stock. Let’s say that growth investors profiting from stocks with excellent earnings growth. Such companies are beating all earnings estimates all the time. Do they have any guarantee that the companies will resume performing with success and how long? They could make a profit only if the company proceeds to generate high profit and grow constantly. But what will happen if it stops to do so? 

    Here we have the value in the scene. Value is important to understand the level of investors’ expectations related to the particular stock. Also, value is helpful to gauge how far some growth stock could drop if it starts to sink. To put this simple, value adds a portion of reasonable thoughts and exact estimates into the calculation. 

    How does GARP work?

    A basic formula for finding GARP is the PEG ratio. It is aimed to measure the balance between growth and value. The optimal PEG ratio should be one or under the one.

    Here is how it works. Let’s say the company is trading at $50 per share with EPS forecasted to rise for15% over the year. 

    P/E ratio = $50/$5 = $10
    PEG ratio = 10/15 = 0,66

    This PEG which is less than 1, makes this company a good candidate for GARP.

    Why does Growth At a Reasonable Price matter?

    This could be an added explanation of what is GARP. GARP helps investors to avoid the possible problems or traps that they may have with complete investing in growth or value stocks. If growth stocks rise too high they may create a bubble that could burst in a minute. On the other hand, value stocks can stay the same in the price for a long time. With GARP investors could find the golden middle zone. The investment stability where they can benefit from rising prices of growth stocks but, at the same time, they’ll be protected with value stocks if the growth starts to fall.

    Some may say that GARP stocks will underperform growth stocks in a growth market. Also, such will notice that GARP stocks will underperform value stocks too but in the value market. Despite these criticisms and objections, GARP could easily outperform in combined markets and could do it over a long time.

    What is a GARP strategy?

    It is a mixed approach to growth and value stock-picking. This kind of investor obtains a combination of returns. In other words, the GARP investing strategy is hybrid.
    In GARP investing it is necessary to look for low price/book ratios and a PEG ratio of less than one, as we said.

    P/B ratio = current price/book value per share
    PEG ratio = P/E ratio/predicted growth in earnings

    We said a GARP investor will obtain a combination of returns. This actually means, when markets are dropping it is better for value investors. Hence, markets are rising. It is better for growth investors. On the other hand, GARP investors could benefit from any market condition because they are somewhere between the mentioned types of investors but unite characteristics of both.

    What is it in essence?

    Growth At a Reasonable Price investing doesn’t have inflexible limits for adding or eliminating stocks. The basic benchmark is the PEG ratio. The PEG presents the ratio between a company’s valuation (P/E ratio) and its required earnings growth rate for the next several years, for example. If stocks have a PEG of 1 or less,  that means the P/E ratio is in line with predicted earnings growth. This helps to find a stock that is trading at a reasonable price.

    During a bear market or other declines in stocks, the returns of GARP investors could be higher than the growth investors can get. However, in comparison to the value investors, GARP investors may have average or under average returns. But since GARP investors hold stocks with characteristics of both growth and value stocks, the average returns they get is higher than average returns for growth and value investors can get from their investments separated.

    Bottom line

    GARP stocks are picked by a joining of earnings growth and valuation when investors want to evaluate the right picks. The idea behind this is to recognize cheap stocks with a growing possibility in the future. Hence, the earnings growth of GARP stocks is notable above that of the market.

    GARP is the abbreviation for “growth at a reasonable price” and represents truly a combination of value and growth investing. So, GARP investors seek for a stock that is trading for somewhat less than its predicted value but has earnings growth potential. GARP stocks are slightly lowered but can grow soon. So, what is GARP? It’s all about how to find stocks that have a future.

  • Growth Stock Investing Strategy

    Growth Stock Investing Strategy

    Growth Stock Investing Strategy
    Growth investing strategy can be a great way to get high returns, but the key is to understand what growth stocks are. Your time horizon and risk tolerance are major factors.

    By Guy Avtalyon

    This is all about the growth stock investing strategy. It is the art of science implemented in investing. Investing requires significant research. But to create the growth stock investing strategy you’ll need a really good understanding and knowledge about growth stocks and underlying business. 

    Why did we say it is the art of science?

    Well, buying a stock is the art itself. Growth stocks are elite stocks because they are what could make a lot of money for you. So, you will need a great growth stock investing strategy to ensure the great gains they are able to provide. Growth stock’s value can be boosted and some careless traders could be faced with its decreased price with no warnings. To avoid losses you’ll need a stable growth stock investing strategy.

    What is growth stock investing strategy? 

    Growth stocks are a popular investment. The reason is quite clear: If some investors can make money by investing in them, why shouldn’t you? But if you want that, you’ll need knowledge, system, growth stock investing strategy to know when and how to react when the right time comes.

    To recognize the right time for investing in the growth stocks the essential part is to know when some company can grow. It could happen due to organic growth, expansion, and in case of an acquisition. But keep in mind, not all growth is a good one.

    Let’s make clear all of these cases of growth.

    When the company improves its operations and capabilities from year to year we can talk about organic growth. But organic growth can shift negative if circumstances change. So, since it is changeable it is still good but not the best growth.

    The growth caused by the expansion of the company means the company is reinvesting. It is actually expanding its operations. For example, the company may invest in its equipment, facilities, new branches, etc. As a result, you’ll notice low or no EPS and a high debt ratio. Sometimes both are visible. Of course, you can ignore low EPS if it is caused due to the company’s development and you see the company is reinvesting.

    We are talking about acquisition and growth caused by that when one company buys the other one. For example, two companies have had a problem with organic and expansionary growth for many years. To solve the problem they bought smaller companies to increase revenue and earnings. This type of growth is very good for dividend investors. 

    But is it good for growth stock investors? We are afraid it isn’t. Growth stock investors prefer expansionary growth. That may give them high returns. That is exactly happening, for example, with companies that started as small but with the potential to expand a big.

    How to develop a growth stock investing strategy

    Growth investing is an investment strategy directed on capital appreciation. Investors who implement this style are recognized as growth investors. But how to get in the race? How to know when is the right time? For that, you’ll need a growth stock investing strategy. 

    First of all, you have to be able to make a difference between the normal market and the situation when the market is not normal. The worst growth stock investing strategy is to jump into the market and make a mess and losses. You will need time to build knowledge when the market is normal. Hence, you’ll need the practice to know when the market is normal to be able to recognize when it isn’t. 

    Why is it so important to know when the market isn’t normal? What are you supposed to do in the markets that are not normal? This part may sound like nonsense but the periods when the markets are not normal are the best time to buy or sell stocks. That’s all wisdom.

    So, you have to maintain your trading journal. That may include everything you read and learn about investing and trading. For example, you can follow economic data for determined periods. No matter if they are weeks or months. Also, your journal should include the market’s movements and investment decisions. 

    Do it effortlessly. You have to know what’s happening in the market, you need to watch how the stocks on your watchlists are performing.

    That will arm you against the emotional risks of trading and making bad trades. Also, that will give you a chance to build an objective, repeatable trading strategy, so your portfolio will perform better.

    You have to understand how the market movements are driven. For example, the market movements are handled by fundamental conditions which are long term, economics which is midterm but also the news which is short term. Economic and fundamental conditions are crucial for growth stocks. What do you mean, how the company can grow if the fundamental or economic conditions are against its progress? It’s impossible. 

    How to select stock for growth investing

    Choosing stocks is not the way you may become rich. That is a mistake and don’t fall into that. You are not just picking a stock, you are choosing it after you estimate it well. In other words, you have to be familiar with stock. So, that to say, choosing stock is a very good way to obtain more education. When you get good knowledge about the market, you’ll be in harmony with the market. 

    Being in harmony with the market will provide you to know when is the right time to enter or exit the position. With this fine-tuned sense of market movements, you will know why the market is doing what it is doing, why it is better to buy or sell, why some stock is going up or dropping down.

    While you are picking stocks, you are actually creating your watch list. Of course, you’ll add only the stocks you are interested in, meaning they meet your investment criteria.

    Making a watch list can improve your growth stock investing strategy. Selected stocks are what you want to know more about, nothing else matters. 

    Of course, it is absolutely okay if you have more than one watch list. You can create it depending on types of stocks, investing style, etc. Also, you can find growth stocks in almost every industry or sector, so you can make a watch list for each sector, for instance, and update them after the earnings cycles end.

    Indicators important for growth stock investing strategy

    That to say, it is always better to follow the trend, not the other investors. Sometimes you’ll need to be patient with your watch list and pay attention constantly. You have to follow the prices’ changes, also the news, and to wait. Always keep in mind that growth stocks are impressive and exciting. Media makes a big noise sometimes about growth companies publishing good information and avoiding bad. That could lead to the stock’s price to rise because the fresh money is coming. But try to avoid following the masses. If you follow the crowd you will never get a favorable price. 

    Wait for the right time to pull the trigger. Sometimes the hardest part of growth stock investing is to recognize when it is the right time to buy. During hype, the prices will go up. But everything will be changed when bad news is on the scene. They will cause the stock price to go down. 

    The growth stocks are flying higher by optimism, desires, and exaltation. Well, investing isn’t based on current earnings. It is based on future earnings.

    For a successful growth stock investing strategy is a more important report that suggests the changes in the future outlook. As a growth investor, you would like to see that the market can reset its expectations. If there is confirmation of such changes you’ll know that the price will drop, sometimes very quick and sharp. That’s the moment when you are going to buy the stock because the price is low. Oh, yes! The reward will come later.

    Using indicators

    Just use technical analysis. You have literally thousands of techniques to analyze the market by using technical analysis. The most important is the trend, support, and resistance levels. If these levels are not clear enough,  check the trading volume. It is maybe the best indicator of the direction of a stock price. 

    When the volume is rising along with the increasing prices it represents the expanding demand and a high possibility the trend will remain to rise. The big secret of growth investing in comparison to the value investing is that growth will win each time.

    Other indicators for growth stock investing are stochastic and MACD. MACD measures the momentum of a stock’s move by the convergence and divergence of two moving averages. Stochastics believe that daily price movement is random inside a general trend. 

    A drop in stock prices inside the uptrend that is supported by bullish signals in MACD and stochastic is one of the most powerful technical entry signals. 

    Is growth investing strategy hard?

    It may seem difficult to create a growth stock investing strategy but it is quite simple. The goal is to discover and invest in growth stocks. Buying them is easy but selling can be the trickier part. Until you sell the stock you’ll not earn money. That’s a simple rule. At least it should be simple unless your emotions are involved. It can be hard to sell the stock that makes a profit. Don’t be greedy. Do it in the peaks. Never think you can do more because in most cases you never do.

    Take profit when you can. Set the take profit point and stop-loss point. 

    At the end of the day, all that matters is profit. 

    Be patient with your growth stock Investing strategy. It is key. Never hunt the higher prices, you can lose money. When you enter a position, wait for prices to go higher. When you notice a selling opportunity, always take the possibility to profit.

  • What is Growth Investing and How To Pick a Stock?

    What is Growth Investing and How To Pick a Stock?

    What is growth investing
    Here is how to recognize the best growth investment stocks and how to execute this investment strategy

    By Guy Avtalyon

    Growth investing is an investment strategy which investors use to find stocks with higher earnings growth prospects. It doesn’t matter how high their prices are. These stocks usually have low dividend yields. Also, they have higher volatility and limited downside protection. Moreover, they are highly sensitive to changes in interest rates. The companies with stocks that trade at high valuation levels usually have a high P/E ratio, high P/B, and P/S ratio.

    Growth investing is focused on capital appreciation. Growth investors invest only in companies that have above-median growth. Even if the stock price looks expensive and metrics like price-to-earnings or price-to-book ratios, confirm that. The growth investing strategy is in contrast with value investing.

    This investing strategy’s focus is on a company that has a track record of high or rising growth. For example, a company has a stock price that has rise year after year over 3 or 4 years. Such stock is a target of growth investors. But the timeline shouldn’t be so long. Even if a stock rise at price every week for 3 weeks in a row growth investors will be interested in that stock.

    Growth investing doesn’t consider direct research or fundamentals only. Very often it may be a response to the market sentiment.

    For example, if you drive BMW and your friends also drive a BMW car. And say, the stock has gone up every month for the last six months. Then you know that the overall market sentiment is good. And the sentiment of the consumers is also a good and valuable metric for growth investors.

    So, you would buy BMW stock if you support the growth investing viewpoint.

    Who are growth investors?

    Some famous investors such as Warren Buffett have stated that there is no theoretical difference between the concepts of value and growth (“Growth and Value Investing are joined at the hip”).

    That’s because the growth is always a component in the calculation of value. It is constituting a variable whose importance can range from a little too vast. And whose impact can be both negative as well as positive?

    Buffet’s opinion in one sentence is: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

    But the real father of growth investing is Thomas Rowe Price, Jr. who worked and promoted growth investing through his company T. Rowe Price. He founded this company in 1937 and today is a publicly-traded multinational investment firm.

    How to execute a growth investment strategy?

    The following businesses are suitable for growth investing:

    • Emerging markets
    • Recovery shares
    • Blue chips
    • Internet and technology stock
    • Smaller companies
    • Special Situations

     

    What is the main issue with growth investing? It is the fear you are buying at the top of the growth curve. One way to avoid this is to look for long-term growth patterns.

    Don’t look at growth surges that last one week, or one month or several months. If you really found a solid company, it should have a history of solid growth. And be able to demonstrate an upward trend in their share price over many years.

    But, Most investors do not relly on growth investing alone. They look at other indicators that can support a pattern for future growth. Let’s take the BMW as an example again.

    If they are bringing out new lines of the car, expanding to different countries then it is clear that BMW is targeting growth as a strategy for the company. So, you may own a good stock if you are using a growth investing strategy.
    This strategy is most effective in the long run. It isn’t suitable for short-term investors for obvious reasons. Growth companies need time to grow.
    Every investor should ask this question: Why is growth investing?
    The possible answer could be because you want a long-term financial stability and wealth accumulation. And you’ll be right.

    How to identify stocks for growth investing?

    Growth investment involves picking essentially strong stocks. These stocks have a promising future compared to other stocks in their sector and will have an edge in terms of returns in the long-term. While choosing stock for growth investing, it is important to ensure some essential factors such as the revenue model, cash inflow, growth prospects with respect to the economy, the company’s executive board, market, competition, etc. Researching would let you know if a stock suits the growth investing strategy or not. It is easy to get an insight when you study the company’s balance sheets and reading up more about its history, endeavors, and goals from its website or some other sources. Before taking the final call on your growth investment, it is very important to ensure whether the asset fits the criteria of optimal returns.

    Here are a few parameters that could be helpful in analyzing whether a stock is a growth stock or not:

    Return on Equity: This means the profit-making potential of the company. It is calculated by dividing the net income of the company with the total equity of the shareholders.

    Increase in Earning per Share (EPS): An increased EPS ensures better growth prospects. Hence, it is very important for you to analyze if the EPS is increasing or not over the observed time.

    Projected Earnings: It gives an insight into the company’s expected growth and can act as a good indicator of growth investment.

    What are the picks for growth investing?

    Small-Cap Stocks: Companies that lie in the suit of small-cap are those that are in their initial growth stages. This makes them more promising in growth prospects, the affordability of the stocks is higher. This enables you to buy a bigger lot of their shares and make a decent investment.

    Technology and Healthcare Stocks: These companies could be a good pick for growth investing. They are a kind of revolutionary innovations, which increases the scope of their growth prospects. The fact they are exceptionally well in the market because they target a wider audience, thus resulting in exponential growth. They stand by the characteristics of growth in the investment.

    Speculative Investments: Even speculative stocks could bring in a fortune in terms of growth investing as they come at a higher risk. If you are choosing a speculative investment, make sure to practice caution and invest only your surplus funds with due diligence.

    The great influence in shaping this investment style had Phil Fisher, whose 1958 book “Common Stocks and Uncommon Profits” is still today a reference for identifying growth companies and we highly recommend this book.