​Six Emerging Growth Stocks for the GARP Investor

Joel Anderson  |


Peter Lynch is well known for a lot of things. His average return of 29% from 1977-1990 was pretty spiffy. His Merrill Lynch (BAC) commercials made his face known to another wide swath of Americans. However, for fund managers and retail investors alike, potentially his biggest contribution has been pioneering the idea of “GARP” Investing. GARP, an acronym for “growth at a reasonable price,” combined the warring tribes of value and growth investors into a single principle.

While traditional value investors are looking to get stocks that are cheap, and traditional growth investors will pay anything for a stock that seems poised to take off, the GARP investor looks for explosive growth with one eye while keeping the other on the price tag. It’s a strategy that mitigates the big risks of growth investing by only buying in when a stock’s price makes sense, while also mitigating the value investor’s risk of getting stuck in a value trap by focusing on companies with clear upward momentum.

So, here’s a look at some current micro- and small-cap stocks that have the trappings of a GARP play, including low PEG and P/B ratios paired with strong sales growth.

Canadian Solar (CSIQ)

Canadian Solar has seen shares get battered this year, as solar stocks collectively suffer through weak oil prices and some well-publicized troubles for industry leaders. However, it could be that this has created a real buying opportunity. Canadian Solar’s valuations show a stock that’s offering a lot for its price, including a P/B of 0.86, a PEG of 0.39, a P/E of 5.13, a Forward P/E of 6.63, and a P/S of 0.22. But stop there and you might overlook the fact that the last three full years of revenue growth have been excellent, coming in at 27.8%, 78.9%, and 17.1% in 2013, 2014, and 2015 respectively. That hiccup in 2015 doesn’t look great, but Q2 of 2016 showed a jump of 26.6% year-over-year.

Throw in the fact that Canadian Solar stock is currently trading in a downward wedge pattern that is traditionally a bullish signal and has a potential upside of 43.3% over its current price before it will hit the mean price target from analysts and the company could be poised to do something big in the near future whether the price of crude cooperates or not.

AV Homes (AVHI)

AV Homes is the first of a trio of residential home builders to make this list, potentially indicating that the currently hot housing market is providing a lot of strong growth opportunities. AV Homes has been having a pretty solid year in 2016. After a sell-off that culminated with shares hitting a 52-week low of $8.50 in mid-February, the stock’s been hot, nearly doubling in price to over $16 a share. What’s more, in recent days, the stock broke past the resistance line of a trading channel it’s been in since that turnaround.

However, if you’re thinking a run like that would mean the stock’s valuation metrics won’t look so good anymore, you’d be wrong. In fact, despite gaining more than 25% in 2016, the stock’s still priced pretty attractively against its earnings and projected growth. The P/E ratio is still just 3.00, P/B is 0.86, P/S is 0.50, and the PEG is just 0.15. With numbers like that, it’s not hard to think AV Homes may have plenty of room left to keep growing.

New Home Company (NWHM)

The New Home Company is another home builder that’s displaying some exceptional value, with a P/E Ratio of just 10.34, Forward P/E of 7.15, P/B of 0.99, P/S of 0.47, and a PEG of 0.41. In part, that’s likely due to the fact that the stock’s down over 15% in 2016. However, the company’s revenue figure would seem to indicate a firm on the rise, spiking sales by a whopping 187.4% in 2015.

William Lyon Homes (WLH)

Like the other two home builders, William Lyon Homes entered the year in a free-fall but hit bottom in mid-February. Since hitting its 52-week low, the company has bounced back to the tune of 130.5%. That still leaves it down almost 25% over the last 12 months, but showing real strength in its recovery. The picture gets better when you consider just how cheap the stock looks at the moment, with a PEG of 0.44 and P/S of 0.44. The company’s also been growing revenue consistently for five straight years, showing that it’s got the potential for real growth.

In each case, the relative success of these housing stocks is likely going to remain tied to the housing market remaining hot, but if the macro climate holds, the metrics would seem to indicate there’s strong potential for big gains here.

Encore Capital Group (ECPG)

Like the rest of the companies on this list, Encore Capital Group, a specialty finance firm, showcases a litany of impressive price valuations, trading at a multiple of 12.3 of earnings and featuring a PEG of 0.82. However, in Encore’s case, that’s likely due to the stock losing almost 25% over the course of the year. The stock is currently trading in a triangle pattern, with declining resistance and rising support levels, and it’s got plenty of room to keep bouncing back, with 56.7% upside before the stock would hit the mean price target it’s getting from analysts. Throw in solid revenue growth in each of the last four years, a trend that had 2015’s FY figure at more than double 2012’s, and Encore Capital Group could be a chance to buy into a growing company at a good price.

Roadrunner Transportation Services (RRTS)

It hasn’t been a banner year for trucking logistics company Roadrunner, with a big miss in its Q1 earnings resulting in the stock going into freefall in early May. However, that may be too narrow of a focus to see the real value at play in this stock. Revenues have been growing steadily for years, and the stock’s still priced attractively with a P/E of 14.46, Forward P/E of 8.41, PEG of 0.96, and a microscopic P/S of 0.17. What’s more, while EPS has dropped so far this year, it’s projected to grow nearly 65% next year.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. 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: http://www.equities.com/disclaimer.

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AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
GOOG

     
XOM

     
BRK.A

     
FB

     
JNJ

     
WFC

     
T

     
NFLX

     
TSLA

     
V

     
UNH

     
PG