There are plenty of ways to pick stocks and to compile a portfolio – there is really no one way which works best. If there was, then in theory at least, every investor would invest the same way and in the same stocks!
Rather, there are plenty of different ways to invest and many ways can produce outperformance. Perhaps the most important thing for an investor to do is to pick a strategy and stick to it – flipping and flopping between different strategies is probably one of the single biggest causes of underperformance.
One such strategy is GARP.
GARP stands for 'growth at a reasonable price'. As the name suggests, the idea is to identify companies which you expect will grow their earnings and then pay a fair price for the stock based on your assumptions.
Listed stock broker Bell Potter recently conducted an exercise to rank 80 ASX-listed companies with market capitalisations over $1 billion based on metrics to help identify GARP stocks.
Basically as a rule of thumb – when utilising a GARP strategy, practitioners will be hoping to not pay a price-to-earnings (PE) multiple much higher than the expected growth rate.
Here are a few of the leading candidates.
Crown Resorts Ltd (ASX: CWN) is forecast to compound earnings per share (EPS) by 15.9% per annum over the next two years. With a historic PE of 15.9x, the stock looks reasonable value considering growth expectations.
Asciano Ltd (ASX: AIO) is forecast to average compound EPS growth of 16.6% over the next two years. With a FY 2014 PE of 17.1, once again investors look like they are getting value for money with this leading rail freight operator.
Super Retail Group Ltd (ASX: SUL) is forecast to grow EPS at a compound rate of 13.6% per annum for the next two years. Trading on a PE of 15.5x, the stock could be a reasonable bet.
Harvey Norman Holdings Limited (ASX: HVN) is expected to produce compound earnings growth of 14% per annum over the next two years. With the stock priced on a PE of 17.3, this is also a stock worth watching.
