There are some investors who believe growth is important, but do not want to pay too much for it. As a result, they are looking for stocks in which growth and value work 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 assessing a stock's prospects are:
- Trailing 12-month and forward PEG ratios less than or equal to 2.
- An average annual net income margin growth rate of more than 5% over the past five years.
- Annual profit is projected to increase by more than 10% every year for the next five years.
- A positive trend in annual operating income over the past five years.
- A price-earnings ratio of less than or equal to 25.
Thus, GARP investors may want to consider the following stocks since they meet the above criteria.
Caterpillar
The first stock GARP investors may want to consider is Caterpillar Inc. (CAT, Financial), a Deerfield, Illinois-based manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines that it supplies worldwide.
The stock closed at $194.86 per share on Monday for a market cap of $100.28 billion and a price-earnings ratio of 15.76. The trailing 12-month PEG ratio was 0.86 and the forward PEG ratio was 1.33 based on the past five-year Ebitda growth rate of 18.30% and the projected five-year earnings per share growth rate of 11.84%.
The annual net income margin increased 154.52% per year over the past five years (fiscal 2017 through fiscal 2021), while annual operating income grew 22.97% per year over the same period. For fiscal 2021 (which ended Dec. 30, 2021), the annual net profit margin was 12.73%, while the annual operating income was $6.87 billion.
The share price has dropped 9.56% over the past year, fluctuating within a 52-week range of $167.08 to $237.90.
On Wall Street, the stock has four strong buy, seven buy, 11 hold and two underperform recommendation ratings. The average target price is $220.04 per share.
Deere
The second stock GARP investors may want to consider is Deere & Co. (DE, Financial), a Moline, Illinois-based global manufacturer and supplier of farm and heavy construction machinery.
The stock closed at $338.19 per share on Monday for a market cap of $103.03 billion and a price-earnings ratio of 17.59. The trailing 12-month PEG ratio was 0.98 and the forward PEG ratio was 1.41 based on the past five-year Ebitda growth rate of 18% and the projected five-year earnings per share growth rate of 12.50%.
The annual net income margin increased 21.38% per year over the past five years (fiscal 2017 through fiscal 2021), while annual operating income grew 33.83% per year over the same period. For fiscal 2021 (ended Oct. 31, 2021), the annual net income margin was about 13.68%, while the annual operating income was $7.49 billion.
The share price has fallen by 7.55% over the past year, fluctuating within a 52-week range of $283.81 to $446.76.
On Wall Street, the stock has four strong buy, three buy, 14 hold and one underperform recommendation rating. The average target price is $384.86 per share.
