Growth at a Reasonable Price (GARP)
Keeping up with our fundamental indicators week (maybe a month, we’ll see 
) I’d like to talk a little bit about analysis known as Growth At a Reasonable Price. This form of analysis was adopted most prominently by Peter Lynch as a great way to find undervalued stock with strong earnings and growth potential.
The Basics of GARP
Stocks that fit in the “growth at a reasonable price” category are those that show strong earnings, as well as strong year to year growth. To find stocks like these, you should look first to the PEG ratio, or price to earnings to growth. A company earning $1 per share with a share price of $20 would have a PE ratio of 20. The same company with annual earnings growth of 20% would have a PEG ratio of 1. ($20/ $1 then divided by 20).
If you’re a real stickler, Peter Lynch style, you’ll look for firms that also have strong underlying book value. That is, the value of the assets (minus intangible assets like patents) minus liabilites. The book value is essentially the value of the company disassembled and sold off in pieces, left over post-it notes and all.
GARP in Practice
GARP is a long term investing strategy where an investor usually buys a stock based on the future outlook rather than today. If growth can continue and the stock is relatively cheap, the higher PE can be sustained as the stock grows to fit. However, one very honest complaint about this strategy is that few amateur investors are good at pricing future value, or for quantifying it in their strategy. A firm growing at 50% per year may only do so for a year or two before growth slows and an exorbitant PE falls due to lessened expectations or at the very best, the company grows to fit.
