4 Attractive GARP Picks for Your Portfolio Based on PEG Ratio

In the equity market, investments always need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that often arises is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.

The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.

Several stocks that have surged significantly in the recent past show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here, we will discuss the success of four such stocks. These are Flex Ltd. FLEX, CVS Health CVS, Urban Outfitters URBN and Exelixis EXEL.

More on GARP

The GARP theory enables strategic mingling of growth and value-investing principles, which gives us a hybrid strategy by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid, sustainable growth potential (Investopedia).

PEG Ratio and GARP

GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.

The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate

It relates stocks’ P/E ratio with their future earnings growth rates.

While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with solid future potential.

A lower PEG ratio, preferably less than 1, is always better for GARP investors.

Say, for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio indicating both undervaluation and future growth potential.

Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.

There are some drawbacks to using the PEG ratio though. It does not consider the very common situation of changing growth rates, such as the forecast of the first three years at a very high growth rate, followed by a sustainable but lower growth rate over the long term.

Hence, PEG-based investing can be even more rewarding if some other relevant parameters are also taken into consideration.

Here are the screening criteria for a winning strategy:

PEG Ratio less than X Industry Median

P/E Ratio (using F1) less than X Industry Median (For more accurate valuation purpose)

Zacks Rank of 1 (Strong Buy) or 2 (Buy) (Whether good market conditions or bad, stocks with a Zacks Rank #1 or #2 have a proven history of success.)

Market Capitalization greater than $1 billion (This helps us to focus on companies that have strong liquidity.)

Average 20-Day Volume greater than 50,000: A substantial trading volume ensures that the stock is easily tradable.

Percentage Change F1 Earnings Estimate Revisions (4 Weeks) greater than 5%: Upward estimate revisions add to the optimism, suggesting further bullishness.

Value Score of less than or equal to B: Our research shows that stocks with a Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.

Our Picks

Here are the four stocks that qualified the screening:

Flex: This Singapore-based company has a diverse workforce across 30 countries and offers advanced manufacturing solutions and additional value to customers through a wide array of services, including design and engineering, component services, rapid prototyping, fulfilment, and circular economy solutions. Flex is gaining from a growing intellectual property (IP) portfolio, new design wins and strategic acquisitions.

FLEX stock can be an impressive GARP investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, Flex also has an impressive long-term historical earnings growth rate of 35.1%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

CVS Health: Headquartered in Woonsocket, RI, this is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. CVS Health is investing in advanced technological capabilities to cut down costs and improve customer experience. Improved Medicare Advantage star ratings for the 2025 payment year are a positive development for the company.

CVS can also be an impressive GARP investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, CVS Health also has a solid long-term expected growth rate of 11.4%.

Urban Outfitters: Based in Philadelphia, PA, Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gift products. The company’s merchandise is generally sold directly to consumers through stores, catalogs, call centers and e-commerce platforms.

Apart from a discounted PEG and P/E, Urban Outfitters has a Value Score of A and holds a Zacks Rank #1. URBN stock also has a 20% earnings growth rate for the last five years.

Exelixis: This Alameda, CA-based oncology-focused biotechnology company primarily focuses on the discovery, development and commercialization of new drugs for the treatment of difficult-to-treat cancers. Exelixis has collaborations with several leading pharmaceutical companies such as Bristol-Myers Squibb, Merck and Daiichi Sankyo Company for various compounds and programs in its portfolio.

The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected earnings growth rate of 21.2%.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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