What are GARP stocks, and what makes them appealing to you?

David Giroux, Portfolio Manager for the US Capital Appreciation Strategy, reveals why Growth-at-a-reasonable-price (GARP) stocks sit in a unique space—and why that makes them one of the most inefficient corners of the equity market.

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GARP stocks refers to ‘Growth At a Reasonable Price’. These are companies that on average can grow earnings in the low double digits, sometimes in the mid teens. These are companies that tend to have really good management teams, really good capital allocation. Companies that tend to be a little less volatile from earnings or even from a beta perspective in the market. And it's probably the most inefficient part of the equity market. Why is GARP inefficient? If you think about all the potential investors in the market. A growth investor might look at a GARP stock and say, you know what? It doesn't grow fast enough, so I'm not interested in it. A value manager might say I'm not willing to pay 18 or 19 times for that company, because I have all these ten multiple stocks on my benchmark. A hedge fund is looking for high volatility stocks when you want to make a bet on a quarter. And a retail investor really has never heard of any of these companies in the past. So there's no natural buyer for these GARP stocks. So as a result of that they trade for a valuation that is too low relative to their fundamentals.

David R. Giroux, CFA Head, Investment Strategy and CIO

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