By Simon Constable
In a recent report—“The Death of Value?”—Wall Street powerhouse Goldman Sachs poses an important question about an out-of-favor investing style.
Its conclusion seems to be that value investing isn’t dead. Rather, it has morphed into a stock-picking strategy known as GARP, or “growth at a reasonable price.”
From 1940 to 2007, “the simple strategy—buying stocks with the lowest valuations and selling those with the highest—realized a theoretical gain in seven out of every 10 years,” the Goldman report says. Over the past decade, that strategy resulted in “a cumulative 15% loss.”
In other words, growth investing—buying stocks of fast-growing companies—did well, while value investing—buying stocks priced modestly—didn’t.
“Investors get excited about growth and they do pay up for it,” says Scott Rostan, chief executive of New York financial-education company Training The Street and an adjunct professor at the University of North Carolina‘s Kenan-Flagler Business School. But sometimes investors pay too much.
Amazon.com shares, for example, trade at 87 times forecast earnings because investors see growth ahead. The Dow Jones Industrial Average, meanwhile, trades at around 18 times forecast earnings, as investors see less growth.
Step forward, GARP.
“A hybrid [of the two investing styles] is a great way to describe it,” Mr. Rostan says. “It has the growth aspect, but it has the discipline of a value investor.”
The trick is to find companies that are growing quickly but aren’t trading at expensive valuations.
Goldman suggests this: Look for companies expected to have annual sales growth of more than 10% in 2017 and 2018, and with market valuations (plus any debt) of less than 7.5 times revenue.