What is GARP/GAARP? Investing Explained

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s GARP/GAARP. 

WHAT’S THIS?

Garp or ‘gaarp’ stands for growth at a reasonable price. Followers of this investment strategy look for shares that have growth potential, but are also attractively priced.

This differs from the ‘growth’ approach whose aficionados prefer shares in illustrious businesses that are expensive but have the capacity to appreciate further, or so it is hoped. Fans of the ‘value’ approach favour shares that are cheap but poised to recover, apparently.

Some Garp investors describe shares that fit their requirements as ‘garp-y’. Such an unlovely made-up word!

ANY CONNECTION WITH THE ROBIN WILLIAMS FILM?

The World According to Garp, based on the novel of the same name, follows the life of writer TS Garp, played by Williams. Successful investing is not one of its themes.

The world according to Garp: Followers of this investment strategy look for shares that have growth potential, but are also attractively priced

HOW DO INVESTORS DECIDE WHICH SHARES HAVE GARP CREDENTIALS?

Most use the PEG (price/earnings growth) ratio, calculated by dividing the share’s p/e (price-to-earnings) ratio by the growth rate of its earnings (profits after tax) over a specified time period. A company with a PEG of below one is seen as undervalued. A PEG of above one is viewed as overvalued.

WHO CAME UP WITH THE TERM?

Its invention is credited to Peter Lynch, the US fund manager who ran the Fidelity Magellan fund in the late 1970s, producing above-average returns during his tenure.

Lynch developed an interest in the stock markets while working as a caddy on a golf course as a teenager, and so honed his skills that he retired in 1990 at the age of 46.

His best-selling books were based on his key investing precepts: do your homework, invest in what you understand and invest for the long run.

ANY OTHER FIRM BELIEVERS?

The late Jim Slater, the financier, was another successful advocate of Garp investing, expounding his views in a book The Zulu Principle. Slater preferred companies to have a PEG of below 0.75.

This investor (and children’s book author) rose to fame as an asset-stripper, acquiring businesses and selling their underperforming assets in a fashion now more associated with some private equity players.

WHERE DO I FIND INFORMATION ABOUT PEG RATIOS?

A Google search is the easiest way. For example, the current PEG for Shell is 0.7, based on its forecast earnings for the financial year ended April 2024.

ARE FUNDS RUN ON THIS PRINCIPLE?

Lots of UK and US funds have a Garp focus, with some US funds relying on the S&P 500 Garp index whose constituents include Alphabet, the Google group and Facebook and Instagram owner Meta.

Artemis has a Smart Garp UK fund whose largest holdings are HSBC, BP, Imperial Brands, GSK and NatWest.

HSBC’s PEG is 0.37, which is lower than the average for banks of 0.97.

IS IT A GOOD WAY TO PICK WINNERS?

No investment strategy is guaranteed to deliver. A share may seem to be a great bargain and an exciting growth prospect, but this can be derailed by external factors.

Instead of selecting individual securities, investors can apply the Garp strategy through index funds that track the S&P 500 GARP index.

This post first appeared on Dailymail.co.uk