Highcroft Growth at a Reasonable Price Strategy
GROWTH AT A REASONABLE PRICE
Invest in understandable stocks, know what you own.
We look to have the marquis names that we own meet the ‘Growth at a Reasonable Price’ criteria made famous by Peter Lynch of Fidelity Investments and Leon Cooperman of Goldman Sachs.
Strategy
Growth at a reasonable price (or GARP) is a style that looks for both growth and value all at the same time. The screen looks to find stocks with growth rates that are better than the market but with valuations that are below the market, giving you the best of both worlds.
The concept behind growth at a reasonable price (GARP), is to find stocks that are considered outperformers in terms of growth rates and future potential but that can also still be considered undervalued or bargains based on their valuation metrics. By combining these two concepts together, investors can strive to combine the benefits of above average growth rates with reasonable valuations. We begin by searching for stocks with growth rates (both actual and projected on both a quarterly and annual basis) that are above the median for the market while also exuding valuations (namely the P/E and the PEG ratio) that are below the median for the market.
Selection Criteria
1. EPS Growth – Year over Year – Greater than 5%
2. EPS Growth – TTM – Greater than 5%
3. EPS Growth – Current Year – Greater than 5%
4. EPS Growth – NTM – Greater than 10%
5. Price/Earnings Ratio – Less than 15 Preferred
6. PEG Ratio – Less than 1.0 preferred, Less than 2.0 acceptable, Less than 3.0 Rarely
7. Market Cap – Greater than $10B for Large Cap and Greater than $2B for Mid Cap
8. Reasonable to Low Debt to Equity – Profit Margin
Screening for Growth at a Reasonable Price
The screen is intended to produce a set of stocks that contain many of the following characteristics (the list below include the Secular Grower and Technical Bull Trend screens):
1. Marquis names
2. Lower valuation and higher growth rate provides a margin of safety
3. Companies with a wide moat or entrenched position
4. Fortress balance sheet
5. Wall Street consensus buy recommendation
6. Companies who likely have a stable earnings history
Current Holdings as of 12/29/2021 – An Example
The example below outlines how a set of large cap, marquis names can be created where the companies are expected to grow earnings above the market average yet they have a valuation that is lower than the market average (creating a cushion of safety). The ‘NEXT 5YR EPS’ column outlines the Wall Street consensus for earnings expectations, this group of companies are generally expected to grow up to twice the rate of the market average.
Peter Lynch
Peter Lynch (born January 19, 1944) is an American investor, mutual fund manager, and philanthropist. As the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than double the S&P 500 stock market index and making it the best-performing mutual fund in the world. During his 13-year tenure, assets under management increased from US$18 million to $14 billion.
A proponent of value investing, Lynch wrote and co-authored a number of books and papers on investing strategies, including One Up on Wall Street, published by Simon & Schuster in 1989, which sold over one million copies. He coined a number of well-known mantras of modern individual investing, such as invest in what you know and ten bagger. Lynch has been described as a "legend" by the financial media for his performance record.
Source: Wikipedia
Leon Cooperman
Leon G. "Lee" Cooperman (born April 25, 1943) is an American billionaire investor and hedge fund manager. He is the chairman and CEO of Omega Advisors, a New York-based investment advisory firm managing over $3.3 billion in assets under management, the majority consisting of his personal wealth.
Directly after graduating from Columbia, Cooperman joined Goldman Sachs. He spent his first 22 years at Goldman in the Investment Research Department as partner-in-charge, co-chairman of the Investment Policy Committee and chairman of the Stock Selection Committee. In 1989, he became chairman and chief executive officer of Goldman Sachs Asset Management and was chief investment officer of the equity product line including managing the GS Capital Growth Fund, an open-end mutual fund, for one and one-half years.
While at Goldman Sachs, for nine consecutive years, Cooperman was voted the number one portfolio strategist in the Institutional Investor "All-America Research Team" survey
At the end of 1991 after twenty-five years of service, Cooperman retired from his positions as a general partner of Goldman, Sachs & Co. and as chairman and chief executive officer of Goldman Sachs Asset Management.
After leaving Goldman Sachs, he organized a private investment partnership, Omega Advisors, Inc. Cooperman retired in 2016 and converted Omega to a family office.
Source: Wikipedia
Peter Lynch, Leon Cooperman, and all other entities and persons referenced are not affiliated with LPL Financial.
Note: past performance is not an indication of future results and expectations might not materialize.
LPL 1-05227211
DEFINITIONS
Dividend Yield - The dividend yield is the ratio of a company's annual dividend compared to its share price. The dividend yield is represented as a percentage and is calculated by dividing the annual dividend yield by the share price.
EPS – Earnings per share (EPS) is a figure describing a public company’s profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company’s quarterly or annual net income and dividing by the number of its shares of stock outstanding.
Forward PE – The forward P/E ratio (or forward price-to-earnings ratio) divides the current share price of a company by the estimated future (“forward”) earnings per share (EPS) of that company. For valuation purposes, a forward P/E ratio is typically considered more relevant than a historical P/E ratio.
Market Cap – Market Capitalization is the total market value of the equity in a publicly traded entity.
Net Profit Margin - Net Profit Margin (also known as “Profit Margin” or “Net Profit Margin Ratio”) is a financial ratio used to calculate the percentage of profit a company produces from its total revenue. It measures the amount of net profit a company obtains per dollar of revenue gained. The net profit margin is equal to net profit (also known as net income) divided by total revenue, expressed as a percentage.
Operating Margin - Operating margin is equal to operating income divided by revenue. Operating margin is a profitability ratio measuring revenue after covering operating and non-operating expenses of a business. Also referred to as return on sales, the operating income indicates how much of the generated sales is left when all operating expenses are paid off.
Potential Upside – Potential upside is a term that refers who what the potential gain or loss is of a stock, when comparing the current price to the potential upside target price.
Price-to-Earnings-Growth Ratio - The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while also factoring in the company's expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio. The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.
Price-to-Earnings Ratio - The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Sales – Sales Revenue is the income received by a company from its sales of products or services, before expenses are considered.
Wall Street Target – Aggregated by www.finviz.com, the Wall Street Target is the price target consensus amongst all analysts who follow the stock. The price target is a professional estimate as to where the company’s price could be twelve months out. In no way is the target meant to be predictive, it is an educated guess and should only be considered part of an investors decision making process. Price targets can change daily.
IMPORTANT DISCLOSURES
This correspondence expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein and may be subject to change without notice. Neither Highcroft Investment Advisors, Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein.
The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. This memorandum is being made available for educational purposes only and should not be used for any other purpose.
Some of the statements may be regarded as forward-looking statements. Forward-looking statements are, by their nature, subject to uncertainty. Forward-looking statements may include assumptions relating to future investment and economic scenarios. When used herein, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect an opinion relating to future events and are not a guarantee of future performance or developments. Reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statemen ts as a result of a number of factors. Accordingly, you should be prudent with your reliance on any forward-looking information or statements.
Investing involves risks including possible loss of principal. Past performance does not guarantee future results. Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing. Wherever there is the potential for profit there is also the possibility of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. The fast price swings in commodities and currencies can result in significant volatility within an investor's holdings.
To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft Investment Advisors, Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.
Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources. The economic forecasts set forth in this material may not develop as predicted.
Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.
The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.
From time to time the publisher, his associates or members of his family may have a position in any securities that may have been mentioned in this report:
This report, including the information contained herein, has been prepared exclusively for the use of Highcroft Investment Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Highcroft Investment Advisors.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Investing in the index would require investors purchase an investment product, which would involve fees and expenses.
ABOUT US
Highcroft Investment Advisors provides retirement planning, investment management, financial planning, fiduciary services, and lifetime income planning. As Certified Financial Planners we are positioned to help you plan for and fund your retirement needs. We act as a fiduciary through LPL Financial’s corporate RIA. Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428).
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Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual. Services include fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs. Financial advisor near me, financial planner near me, independent planner near me.