What is GARP/GAARP? Investing Explained
INVESTING EXPLAINED: What you need to know about GARP or “GAARP,” which stands for growth at a reasonable price
In this series, we break down the jargon and explain a popular investment term or theme. Here it is GARP/GARP.
WHAT IS THIS?
Garp or ‘gaar’ stands for growth at a reasonable price. Supporters of this investment strategy look for stocks that have growth potential, but are also attractively priced.
This differs from the “growth” approach, where enthusiasts favor shares in illustrious companies that are expensive but have the ability to further appreciate, it is hoped. Enthusiasts of the “value” approach favor stocks that are cheap but apparently poised to recover.
Some Garp investors describe stocks that meet their requirements as “garp-y.” Such an unkindly invented word!
ANY CONNECTION WITH THE ROBIN WILLIAMS MOVIE?
Based on the novel of the same name, The World According to Garp follows the life of writer TS Garp, played by Williams. Successful investing is not one of the themes.
The world according to Garp: Adherents of this investment strategy look for stocks that have growth potential, but are also attractively priced
HOW DO INVESTORS DECIDE WHICH STOCKS HAVE GARP DATA?
Most use the PEG (Price Earnings Growth) ratio, which is calculated by dividing the stock’s P/E (Price to Earnings) ratio by the growth rate of earnings (earnings after tax) over a period of time. A company with a PEG of less than one is considered undervalued. A PEG of more than one is considered overvalued.
WHO GOT THE TERM WRONG?
The invention is credited to Peter Lynch, the American fund manager who ran the Fidelity Magellan fund in the late 1970s and achieved above-average returns during his tenure.
Lynch developed an interest in the stock markets while working as a golf course caddie as a teenager, and honed his skills to such an extent that he retired in 1990 at the age of 46.
His best-selling books were based on his core investing principles: do your homework, invest in what you understand, and invest for the long haul.
ANY OTHER STRONG BELIEFS?
The late Jim Slater, the financier, was another successful advocate of Garp investment, expressing his views in a book called The Zulu Principle. Slater preferred companies to have a PEG of less than 0.75.
This investor (and author of children’s books) rose to fame as an asset stripper, acquiring companies and selling off their underperforming assets in a manner now more associated with some private equity players.
WHERE DO I FIND INFORMATION ABOUT PEG RATIO?
A Google search is the easiest way. For example, the current PEG for Shell is 0.7, based on projected earnings for the fiscal year ending April 2024.
ARE FUNDS EXECUTED ACCORDING TO THIS PRINCIPLE?
Many UK and US funds have a Garp focus, and some US funds rely on the S&P 500 Garp index, which includes Alphabet, the Google group and Facebook and Instagram owner Meta.
Artemis has a Smart Garp UK fund whose largest holdings are HSBC, BP, Imperial Brands, GSK and NatWest.
HSBC’s PEG is 0.37, which is lower than the average for banks of 0.97.
IS IT A GOOD WAY TO SELECT WINNERS?
No investment strategy is guaranteed to deliver results. A stock may seem like a bargain and an exciting growth prospect, but this can be derailed by external factors.
Instead of selecting individual securities, investors can apply the Garp strategy through index funds that track the S&P 500 GARP index.