“I am not a philanderer,” a colleague of mine once said, “But if I were….” He then proceeded to say which of our co-workers he found most attractive.
In the same vein, I am not a GARP investor. GARP stands for “growth at a reasonable price.” It is the middle ground between the value school of investing (bargain hunting) and the growth school (finding the next Google). I’m a dyed-in-the-wool value guy.
Once a year, around Thanksgiving time, I loosen my belt and select a few stocks I think are attractive from a GARP perspective. The stocks I will recommend today sell for 16 to 20 times the companies’ per-share earnings. Normally, I won’t pay more than 15 times earnings.
I have a couple of colleagues who are closer to the GARP school than I am. Therefore, there are a few GARP stocks in my firm’s client portfolios.
Here are five GARP stocks I would buy “if I were” a GARP investor.
Applied Materials
Applied Materials Inc. (AMAT, Financial), based in Santa Clara, California, is one of the largest semiconductor equipment manufacturing companies. It also makes solar-energy equipment and factory-automation software.
In its latest fiscal year, which ended in October, it appears the company just missed breaking its profit record, set in 2007. The stock sells for just under 20 times recent earnings, but only about 13 times the earnings analysts expect for fiscal 2017.
Electronic Arts
A video game company, Electronic Arts Inc. (EA, Financial) has shown outstanding profitability in the past two fiscal years and so far this year. Return on stockholders’ equity has been north of 30%, which is outstanding.
If you (or your children) have played The Sims, Need for Speed, or Battlefield, you have been using Electronic Arts products.
My clients own Electronic Arts shares, even though it sells for 20 times earnings, which is rich for my blood. My colleague Katharine Davidge chose it for my firm’s Model Portfolio, the basis for many client holdings.
FactSet Research
The two selections mentioned so far are large-company stocks. A mid-sized GARP pick I like is FactSet Research Systems Inc. (FDS, Financial), which is one of the best-known stock-market database companies. I’ve used its products off and on for a couple of decades.
FactSet made a profit in each of the past 15 years – yes, even in recession-ripped 2008. According to Guru Focus, its ten-year revenue growth rate is about 12%, its five-year rate is close to the same mark, and the latest year saw 14% revenue growth. The stock fetches 20 times earnings.
My colleague Tom Macpherson owns FactSet in a couple of accounts he personally manages.
Leggett & Platt
From Carthage, Missouri comes Leggett & Platt Inc. (LEG, Financial). It makes a variety of industrial products, from mattress coils to lumbar supports for car seats, from steel rod to frames for reclining chairs.
Sounds prosaic, but this metal bender has posted a profit in 14 of the past 15 years, and profitability hit a high in the past four quarters, with a sterling return on equity of 35%.
Given those achievements, a price/earnings multiple of 18 seems reasonable.
Ruth’s Hospitality
I’ll close with Ruth’s Hospitality Group Inc. (RUTH, Financial), which owns three chains of steak restaurants and two chains of fish places. The best-known subsidiary is Ruth’s Chris Steak House.
After a disastrous 2008, Ruth’s Hospitality has bounced back with six profits in the past seven years. Results for the latest 12 months are the best since 2006 – a return on stockholders’ equity of about 34%.
Plus, I really like their steak.
The stock trades at 18 times recent earnings.
Track Record
This is the 16th column I’ve written recommending stocks from a GARP approach. The recommendations from the previous ones have achieved a 12-month return of 11.57% on average. The comparable figure for the Standard & Poor’s 500 Index is 7.96%.
Ten of the 15 columns have been profitable, and ten (but not the same ten) have beaten the S&P 500.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
My recommendations from a year ago returned 3.09% versus 6.75% for the index. Lanstar System Inc. (LSTR) and General Dynamics Corp. (GD) did well, but Jones Lang LaSalle Inc. (JLL) dropped sharply.
Disclosure: Most of my clients own shares in Electronic Arts and General Dynamics, and so do some of my family members. A couple of my firm’s accounts own FactSet.
