There are some investors who believe growth is important, but also do not want to pay too much for it. They are screening the market for stocks in which growth and value are working together, laying a strong foundation for an investment they hope will be successful.
Five common fundamental indicators that "growth at a reasonable price," or GARP, investors refer to when they evaluate the outlook of a stock include:
- Trailing 12-month and forward PEG ratios are less than or equal to 2.
- A more than 5% yearly average increase in the annual net income margin over the past five years.
- Annual earnings are projected to increase more than 10% every year for the next five years.
- A positive trend in the annual operating income over the past five years.
- A price-earnings ratio less than or equal to 25.
Thus, GARP investors may want to consider the following stocks, since they match the above criteria.
Reliance Steel & Aluminum Co
The first stock GARP investors may want to consider is Reliance Steel & Aluminum Co (RS, Financial), a Los Angeles, California-based operator of approximately 300 metals service center processing and distribution facilities across 40 states in the US and overseas.
The stock closed at $166.83 per share on Friday for a market cap of $10.45 billion and a price-earnings ratio of 9.61. The trailing 12-month PEG ratio was 1.13 and the forward PEG ratio was 0.58, based on the past five-year Ebitda growth rate of 8.50% and projected five-year earnings per share growth rate of 16.54%.
The annual net income margin increased by nearly 12% per annum over the past five years (2016-2020), while the annual operating income increased by 8.63% per annum over the same period.
The share price has grown by 38% over the past year, fluctuating within a 52-week range of $114.26 to $181.20.
On Wall Street, the stock has one strong buy, four buys and three hold recommendation ratings. The average target price is $178.86 per share.
Meritage Homes Corp
The second stock GARP investors may want to consider is Meritage Homes Corp (MTH, Financial), a Scottsdale, Arizona-based builder of single-family homes in the United States.
The stock closed at $115.21 per share on Friday for a market cap of $4.30 billion and a price-earnings ratio of 6.77. The trailing 12-month PEG ratio was 0.32 and the forward PEG ratio was 0.62 based on a past five-year Ebitda growth rate of 21.10% and projected five-year earnings per share growth rate of 10.90%.
The annual net income margin increased by about 19.88% per annum over the past five years (2016-2020), while the annual operating income increased by about 28.77% per annum.
The share price has climbed nearly 30% over the past year, fluctuating in a 52-week range of $78 to $120.19.
On Wall Street, the stock has one buy, ten holds and two underperform recommendation ratings. The average target price is $138.13 per share.
