These characteristics are reminiscent of GARP, growth at a reasonable price. If you are not familiar with it, the GARP strategy is a combination of both value and growth investing: it looks for companies that are somewhat undervalued and that have solid sustainable growth potential.
To get into the details, the screen looks for stocks with PEG less than 1.2, ROE greater than 25, positive cash flow over the trailing four quarters and a very low Debt-to-Equity ratio. A further requirement is that the stock's performance has been no worse than 10% below that of the S&P 500. I put the result on Alert HQ Premium as the Profitable Growth Stock Report. At this point, I'm running the report on a weekly basis.
What's interesting about the report this week is that we have 49 stocks on the report and 42 of them (85%) have managed to beat the S&P 500 over the last 52 weeks. That's not bad for a year when the S&P 500 returned nearly 14%.
How to use this report --
First of all, it seems like this screen does identify stocks with strong performance.
The next question, however, becomes where to focus your attention. Let's break the list down into three segments:
- The stocks at the top of the list are, at this point, rip roaring momentum stocks and from a relative strength/overbought/mean reversion point of view it would seem that it is late to be buying these stocks. Nevertheless, many have very strong bullish trends and trend-followers might want to take note.
- The stocks at the bottom of the list have underperformed the S&P 500. That's not the hallmark of a growth stock.
- The stocks in the middle of the list seem to comprise the sweet spot. Growing strongly but no yet so horribly over-priced. There are a slew of quite interesting stocks that have out-performed the S&P 500 by less than 60% that still seem attractive given their growth prospects. Some, like Lam Research (LRCX), are currently surging while some, like Dollar Tree (DLTR) are in the process of pulling back and becoming potentially more attractive to the value oriented investor. Also included in this segment is Apple (AAPL) which remains a quintessential growth stock.
Disclosure: no positions in any stocks mentioned in this article though I do have a small position in CBPO which happens to be in the middle of this week's list