Tipping Point: What is the GARP approach to investing?

What is the GARP approach to investing?

GARP stands for growth at reasonable price. This approach is well-suited to current market conditions when a large number of stocks are trading at more than their five-year average P/Es (price-to-earnings ratio). If you adhere to a strict value approach, you would not be able to invest in any of these stocks. So, many investors rely on the PEG (P/E to growth) ratio.

How are stocks chosen here? 

To calculate the PEG ratio, a stock’s P/E ratio is divided by its EPS (earnings per share) growth rate. If the PEG ratio is less than one, individual can invest in the stock even though the P/E ratio looks high. The EPS growth rate used can be historical. Some analysts also use estimated EPS growth rates for the future. The rationale: Many high P/E stocks are able to maintain a high earnings growth rate for a long time, thereby justifying the investor’s faith in them.