Finding Best Undervalued stocks to buy now is Super Easy with GARP Strategy
Well, people often search on Google for the best undervalued stocks to buy now. It generally happens in bear markets. But I have a question for all such people, don’t you think this search query is just incomplete? Why? Because, why do you need undervalued stocks only? Why don’t you need growth stocks with reasonable or undervalued prices? There are many stocks in the market that are undervalued but have not performed well in terms of return generation. So , don’t just look for the best undervalued stocks to buy now, it's better to find both undervalued + growth stocks.
But theoretically it sounds good but practically how to find it? Well, in this blog , you will learn how to find the best undervalued stocks to buy now which have high growth potential. In fact you can use this strategy anytime , no matter the bull market or bear market.
To find undervalued stocks with high growth performance, there is a strategy called GARP (Growth at a Reasonable Price) strategy.
This post will contain parts of the GARP (Growth at a Reasonable Price) strategy, and let me also present to you, how can you do it from your house. And yes, I will also show you some stocks using a stock screener in real-time. So, let’s get started!
What is GARP Strategy?
GARP strategy is said to be a sound strategy in terms of growth and valuation. In simple words, it’s like acquiring a race car for the price of a Maruti. Exciting, right? So, now let’s see what are these.
Investors often tend to grow their pockets by chasing too much growth forgetting to check whether the stock is overpriced or not. At the same time, it is also possible that value investors miss some growth stocks since their purpose is only to invest in cheaper stocks. GARP is right in the middle of both extremes: these are companies that can still grow reasonably fast but are not overly advertised by the consensus.
Key Principles of GARP:
Growth Potential: Get into companies with previously achieved solid performance and future growth rates.
Reasonable Valuation: The price of the stock should be reasonable in accordance with its growth opportunity value –often expressed in P/E or PEG ratios.
Sustainable Growth: Invest in companies that have fundamental and competitive advantages.
How to Use the GARP Strategy- The 7 Parameters
To make this easy, we use seven key parameters to only invest in profitable stocks. These parameters are easy to look at through a stock screener.
EPS Growth: The concept of Earnings, referred to in this case as Earnings per Share, EPS explains how much a single share of the firm is generating in terms of profit. The companies we wish to target must show EPS for the last 5 years to have been growing in some or a large extent by 15-25%.
Price to Earnings Ratio: Price to Earnings alue shows how much one is paying for every rupee of earnings. Saving Grace: Low P/E (less than 20) means the price of the share is fair.
PEG Ratio: It is the ratio of P/E Ratio to Growth Rate. Stock with PEG less than one is considered undervalued with respect to its growth potential. Here we’ll tolerate up to 1.2.
Return on Equity: The highlighted part will mean of how much profit you have made with the funds from equity holders. Here we have a target ROE of more than 15%.
Return on Invested Capital: This measure indicates how well the company is able to achieve returns with the debits and equities at its disposal. Our expectations want it to be above 10%.
Debt to Equity Ratio: A low Debt to Equity Ratio (D/E) of less than 1 implies that the company is in good financial condition. Less debt, less risk!
Market Cap: The following factors are also important depending on the investment objectives. Depending on your preference, you can opt for small, mid, or large-cap shares.
Let's Do a Real-Time Search
Let's begin with a screener search and apply such parameters to find stocks that have an expected increase in their earnings as well as being reasonably valued. You can easily do this yourself, but here’s how I filter stocks using a free stock screener:
EPS Growth > 15%
P/E Ratio < 20
PEG Ratio < 1.2
ROE > 15%
ROIC > 10%
Debt to Equity < 0.5
Market Cap: Based on your preference (I’ll leave this one to you).
After applying the above mentioned filters, you shall have GARP stocks in hand. This is a category of stocks that has the best of both worlds - reasonable growth at a reasonable price.
Where to search:
Step -1 - Go to screener.in
Step -2 - Go to screens or simple skip step 1 and Click here.
Step -3 - Go to “Create new Screen “
Step - 4 - Copy all the parameters discussed above and run the query. Sample is below.
Reasons That GARP Will Never Fail
The charm of GARP is that it doesn’t reach the extremes of growth investing or buying stocks that are deemed undervalued. It is also not simply looking for the most attractive growth strategies or buying value stocks blindly. Instead, it seeks out stocks that offer reasonable prices relative to future growth. This strategy lessens the danger of trend-following or investing in low-growing stagnant stocks.
Concluding Remarks
With the use of the GARP strategy, you are able to create a portfolio that consists of the best of growth and value type of investing. It is a sensible, very functional approach to investing, regardless of whether you are new to the market or are a seasoned investor.
So, are you bothered as to when to do this? Do it yourself, and come back in the comments section on how it goes! And make sure you send this post to other investors who want to hunt for the best stocks without much effort.
