Written by Nathan White, Chief
Investment Officer of Paragon Wealth Management
Growth at a reasonable price,
or GARP as it’s known in the investment world, is practically the holy grail of
investing. Whether you’re a value or growth disciple (or any other type
of investor for that matter) in the end everyone wants the same thing – their
investment to go up. Short sellers excluded of course. GARP is
theoretically the best of both the value and growth worlds. Who wouldn’t
want a stock that is cheap and has good growth?
The risk with value investing
is that the stock is cheap not because it is undervalued but because its
fundamentals are deteriorating and offer little prospect of reversing.
It’s the classic value trap that many fall for. The risk on the growth
side is that stocks with higher growth rates tend to be expensive and priced
for perfection. Any disappointment can bring the stock down in a hurry.
In actuality, most GARP stocks
fall somewhere on a continuum of relative growth to value and an investor or
manager decides what their threshold is. Because I view investments in a
relative manner I have always like the idea comparing growth to value as a way
of finding good investments. For example, right now one of my favorite
investment ideas is in the emerging markets. The MSCI emerging markets
index trades at a PE of 11 compared to 14 for the S&P. That is about
a 30% difference. In the past emerging markets have traded at
premiums to developed markets to compensate for their growth and risk.
While growth rates in emerging markets have come down from the lofty levels of
the past, they are still much higher than in developed countries (e.g., 2.5%
for U.S. vs. 8% for China, 5.3% for India). I believe this is a great
GARP opportunity as emerging markets have cheaper valuations and better growth
than many developed markets.