Growth At a Reasonable Price (GARP)
What it is:
How it works (Example):
A fundamental formula for finding GARP is the price/earnings growth ratio (PEG). The ratio divides a company's current P/E ratio by the earnings growth rate and is designed to measure the balance between growth and valuation.PEG optimal PEG ratio is one or less.
ABC's P/E ratio is ($70/$7 = 10), and its PEG ratio is (10/20 = 0.5).
The PEG is less than one and makes ABC a good candidate for GARP.
Why it Matters:
GARP seeks to avoid the disadvantages or pitfalls possible with pure growth and pure value stocks. Growth stocks can form a bubble by rising very high and crashing very fast while value stocks can go nowhere for a long time. By finding the GARP middle ground, investors seek to enjoy rising prices without being vulnerable to a price crash.
[Warren Buffett likes to say that "growth and value are joined at the hip." Learn more about substituting the PEG ratio for the P/E ratio by reading The Common Ratio Misleading Generations of Investors.]