Growth at a reasonable price, or GARP, is an investment method that seeks undervalued stocks with significant earnings growth rates. Although the method might sound like Utopia, investors often get caught in value traps or busted growth companies mistaken for GARP opportunities.
It is critical to utilize solid data and gather a comprehensive understanding of a company's business model to avoid falling into value traps or being bamboozled by busted growth stocks. Therefore, I decided to utilize GuruFocus' database to assess the outlook of various companies and concurrently identified two exceptional GARP opportunities, namely Vista Energy SAB de CV (VIST, Financial) and Compagnie Financiere Richemont SA (CFRUY, Financial).
Here is what I discovered.
Vista Energy
Vista Energy (VIST, Financial) is a Latin American oil and gas exploration company with significant growth prospects as it possesses access to low-cost basins with potential for scale. The company's primary assets are located in the Neuquina and Vaca Muerte Basins in Argentina.
The company's headline assets have contributed significantly in recent times. In te first quarter, Vista's oil properties produced 520,207 barrels of oil equivalent per day, up 19% from a year ago. Moreover, its shale production surged by 40% since the same time last year, driven by a tie-in in five Well-Pad PBOs.
Although oil and gas prices have receded by an unwanted amount in recent months, Vista Energy's low-cost business model allows it to generate shareholder value throughout the economic cycle. For example, despite receding commodity prices, the company recently committed $161.8 million in capital expenditures toward expansion projects in the Vaca Muerte Basin while achieving an operating profit margin of 54.18%, illustrating its robust internal growth.
Vista Energy can be considered a GARP stock primarily due to its impressive price-earnings to growth ratio of 0.13, which implies that market participants underscore its earnings per share growth. In addition, the company has a price-book multiple of 2.14 while exhibiting an average five-year annualized revenue growth rate of 32.2%.
After considering most of Vista's headline features, it is safe to conclude the stock shows tremendous potential.
Compagnie Financiere Richemont
Compagnie Financiere Richemont (CFRUY, Financial), also known as Richemont, is a Swiss luxury retailer that plays host to brands like Cartier, Dunhill, Panerai, Rembrandt, IWC and many more.
Founded by South African businessman Johann Rupert, Richemont's business model focuses on producing and retailing Veblen goods that are not sensitive to the economic cycle as they are targeted at a small group of wealthy consumers.
The success of the company's business model was again illustrated in its latest operating quarter as it blitzed through a trying economic period and delivered 19% year-over-year sales growth. During its fourth quarter, Richemont's operating margin rose by 280 basis points, reaching 25.2% amid the company's ability to pass through inflation to its consumers without altering its operating cost structure.
In a recent change in business strategy, Richemont decided to emphasize its direct-to-consumer approach, which now spans approximately 74% of its revenue mix, allowing it to phase out unnecessary overhangs on its cost structure. The company has experienced robust demand for its more renowned products, including the Jewelry Maisons business, which currently sits on an operating profit margin of 35%. In addition, growing demand from Asia for brands such as Cartier and Van Cleef & Arpels could benefit it in the foreseeable future.
Another catalyst to note is Richemont's maintenance capital expenditure program, which has seen it revamp approximately 51% of its stores in the past few years. Additionally, the company plans to open five new Buccellati Boutiques within the next year, with a central focus on emerging markets in Asia.
A look at Richemont stock's key metrics implies it provides investors with an excellent GARP opportunity. For example, the stock's PEG ratio of 1.93 is accompanied by a three-year free cash flow growth rate of 25.4%.
Lastly, Richemont pays a dividend with a forward yield of 1.43%, adding allure to the stock's total return prospects.
Risks
As mentioned in the introduction, GARP stocks are often risky bets. If consumer sentiment continues to wane, Richemont might run the risk of receding growth rates and a markdown in its valuation.
Furthermore, Vista Energy faces challenges from softening oil and gas prices. It remains improbable that energy prices will revert to the levels they did in 2022 as the global supply and demand landscape has evened out. Therefore, investors interested in Vista's stock must be aware a compression of the stock's profit margins is highly probable.
Final word
Investors can capitalize throughout the economic cycle by investing in GARP securities. Although possessing various risks, stocks like Vista and Richemont provide investors with best-in-class options as market participants have yet to fully price in their growth prospects.
