Is Peter Lynch's GARP Investing Dead?

Joel Anderson  |

Growth At a Reasonable Price - that's the simple plan behind the acronym. And a solid one, if truth be told. Growth investing, in which one targets companies with earnings that are growing faster than those of the market, and value investing, in which one seeks out companies that are attractively priced based on their underlying assets, are often presented as being conflicting investment strategies. And it's not hard to see why, a company flush with potential and rapidly growing earnings attracts investors, which often results in a share price that's at odds with the company's present earnings. Others, though, see them as going hand in hand. Like Berkshire Hathaway ($BRK.A) CEO Warren Buffet, who once opined that "Growth and Value Investing are joined at the hip."

Depending on how you look at it, Peter Lynch fits into either idea with his GARP investing model. Either GARP is the mid-point between two opposing sides or the pinnacle of their natural synergy. Either way, Lynch rode the idea of finding stocks with growth potential that still had attractive prices to average 29 percent annual returns for the Fidelity Magellan Fund from 1977 to 1990.

But is this idea dead? Are there really growth plays that are worth making that one can still invest in on the cheap? This last Thursday Twitter (TWTR) the open market. It's microblogging platform is growing quickly, but the lack of any real profits as of yet would seem to make it an ideal candidate. Wrong. Shares skyrocketed, making Twitter a $20 billion company despite only managing to crack $150 million in revenue this last quarter and losing money since it came into existence. Across the board, growing companies feature sky-high valuations. Companies like Amazon (AMZN) , Tesla (TSLA) , and Facebook (FB) currently have price multiples that Benjamin Graham would most likely consider a joke and scare off all but the most ardent believers in their growth.

So, is GARP dead? Is their real growth out there to be had at a reasonable price? Not Hail-Mary plays, but companies with proven ideas on their way up.

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An Information Age

Believing that the days of GARP are long gone isn't so crazy. A lot has changed since Peter Lynch's days. For starters, information trades at a much faster rate. Getting up to the second information on, well, anything, really, is just the way of the world in the internet age. As fast as someone can have a big idea, it can spread. And with so much of today's innovation happening online, it's nearly impossible to catch something on the rise. Facebook went from existing in a college dorm to being worth more than $100 billion in less than a decade. Gone are the days of slogging along, growing at a reasonable rate each quarter as you build toward that major success. Now, one has to jump on board early and often. Identifying a growth opportunity before anyone else is virtually impossible.

What's more, even this new market is starting to become old hat to some. The dot-com bubble already came and went, building up massive fortunes and then torching them just as quickly. Nobody has to get used to the idea that one good idea and a website can be a multi-million company almost overnight. Or at least, if they do, they're probably not someone with enough up-to-date knowledge that they should be looking for growth plays.

The Wisdom (or Lack Thereof) of the Crowd

And as with any investment strategy, once it's out there, its effectiveness is largely eroded. The value of a stock isn't decided by earnings, or growth potential, or anything tangible, really. They're defined by what someone's willing to pay for them. And given that value investing relies so heavily on what the market's willing to spend on something, the perception of value itself can increase the price of a stock. So, with Peter Lynch's legendary status on the Street, and his strategies picked over by investors and fund managers alike the world over, a company showing the signs of being a GARP play, things like a reasonable P/E ratio, low PEG, and earnings growing faster than the market, is going to be in high demand. That demand will pump the price up, and that higher price will, in turn, make the stock a less intriguing value play.

It's the same basic principle that lays basically any successful investment strategy low once it's public knowledge: you're only going to get a good deal if you see value where others don't. And if people know what you perceive as value because it's a well-known and successful approach, you won't get them to sell you that asset at the price you want.


That said, that doesn't mean that one couldn't find a chance for a GARP play out there. It would just involve digging deep. Turning over rocks that others haven't yet. Looking in industries that haven't traditionally been the source of growth plays. In the end, the basic concept of the GARP play is never going to die. It's just that the GARP plays that carried Peter Lynch to his fortune aren't going to be around anymore. The GARP plays that might carry you to your fortune? They may be there, but you're gonna have to work them out for yourself.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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