While most investors even consider themselves growth or value investors, there are some stocks that meet both criteria. In this article, we will determine whether a stock can be both 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 generally considered either growth or value stocks, there are some 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 should pick a certain investment style and stick to it, GARP shares offer the best of both worlds.
What are the benefits of investing in GARP shares?
GARP shares offer investors the opportunity to buy growth companies at reasonable valuations. GARP stock can present earnings growth at an attractive valuation. This helps an investor diversify his portfolio, especially if he typically invests in growth or value stocks.
How a stock can be both value and growth
When a growth stock misses estimates or has less growth than expected, this is a normal market reaction and the stock usually declines. This provides an opportunity for investors who may want to invest in growth stocks but don’t want to buy them when they overrated.
In some cases, a stock may underperform for a quarter or two due to external reasons, and it may continue to rise over the long term.
A stock can also be considered GARP if the company is growing at a faster rate than the market or analysts expect. Investors with industry or company information can identify these stocks and profit from them.
Finally, there are also companies whose future growth is not fully factored into the stock valuation. In these cases, the market expects the company to grow, but expectations may be too conservative.
How to find GARP shares
The most common stock metric used to find GARP stocks is the PEG (price-to-earnings-to-growth ratio). The PEG ratio is calculated by dividing the price-to-earnings ratio by the earnings growth.
PEG ratio = P/E / Earnings growth
What is a good PEG ratio for GARP stock?
Traditionally, a PEG ratio below 1 indicates that the stock is undervalued and should therefore be considered. Also, a PEG ratio greater than 1 means the stock is likely overvalued. Generally, the lower the PEG ratio, the more undervalued the stock is.
GARP Stock Search
There are several different ways to find the right GARP stock to invest in:
ETF and index
One of the easiest ways to find stocks that are a combination of both growth and value is to look at ETFs that follow this strategy. One of the most popular is Invesco S&P 500 GARP ETFand if you analyze ETF holdings, you’ll find plenty of growth stocks at attractive valuations.
You can also find these promotions by browsing the promotions included in the S&P 500 GARP Index which tracks growth companies at attractive valuations.
Using a stock screening tool allows investors to identify the stocks they want to research or invest in. One of the most powerful stock screening tools available to investors is – Stoke Rover, which allows you to view thousands of different stocks. You can try it for free here.
Finding Low PEG Stocks
The easiest way to find stocks with a low PEG ratio is to use a stock screener that allows investors to filter stocks based on various metrics. You can check stocks with a PEG ratio of less than 1 and compare different metrics to determine if the stock is truly undervalued or growing.
You should be aware that although stocks with low price/earnings growth ratios are attractive in some cases, current earnings or expected revenue growth may be overstated. For this reason, it is very important to research the company.
Companies that are growing at an attractive valuation
You can also find companies that are growing at attractive valuations without necessarily using the PEG ratio. One of the best ways to do this is to check out stocks with growing earnings and low price-to-earnings ratios and low booking price.
As with low-PEG stocks, it’s critical that investors review the company’s financials to assess whether low PEG and balance sheet ratios represent an understatementor if there are other risks associated with the shares.
Example of GARP shares
Currently, there are two stocks that stand out as interesting GARP stocks: Alibaba and Facebook. Both companies are currently trading at an attractive valuation relative to their past and expected growth.
Facebook currently trades at a price-to-earnings price below 13, and despite a high PEG ratio of more than 2, the company could surprise analysts in the long term as it continues to grow.
Another case is Alibaba, currently the P/E ratio is 30, but the PEG ratio is below 1 at around 0.8.
For now growth and significance generally conflicting strategies, there are advantages to using both investment styles find shares. This approach allows investors diversify their portfolios while investing in companies whose earnings are expected to grow, but not overpaying for the stock.