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   This is a translation of the former paper published by André Gosselin on the OrientationFinance.com web site on July 12 2005 ( Read the original paper in French here).


   The word GARP, in the mind of a professional investor, does not necessarily refer to the character of the famous novel of John Irving (The World According To Garp). It is the nickname of an investment strategy which is related to the growth approach, and which actual name is Growth At Reasonable Price.

   The GARP approach is a happy mix of the value and growth styles. Its growth side resides in the research of companies which enjoy profits growth higher than the average of the companies on the market. Its value side quite simply consists in paying the lowest possible price for a growth security.

   In concrete terms, the disciples of the GARP approach buy company stocks only on the condition that its price/earnings ratio is quite lower than its profits growth rate. The pure and hard "garpists" would even say that true bargains are recognizable when the price/earnings ratio is two to three times lower than the expected yearly profits growth rate.

   The Microsoft stock, for example, was negotiated at one point with a price/earnings ratio of approximately 60, whereas the analysts were expecting a profits growth rate of 15% per year for the next five years. With a price/earnings ratio four times higher than the growth rate of the profits, the company founded by Bill Gates is far from being an attractive stock for a "garpist". The ratio of its price/earnings multiple divided by its profits growth rate (what the analysts call the PEG ratio for Price Earning Growth ratio) is 4 (60/15 = 4). It was definitely too high at this time.

   The owner of ski and holiday resorts Intrawest, traded in New York and Toronto, represented a much better bargain than Microsoft. At the beginning of March 2002, the stock was traded in New York with a price/earnings ratio of 14, and ten analysts who follow the company expected, on average, a growth rate of the benefit of 19% per year for the next five years. With a PEG ratio of only 0,74, the Intrawest security portrayed an interesting candidate for the portfolio of a growth style, cautious and thrifty investor.

   Do you believe that the securities with a PEG ratio lower than 1 are too rare? 130 securities registered on the American stock exchanges had a PEG ratio lower than 0,5 on March 12, 2002. In spite of a context where we hear again and again that the stocks are at prices historically very high, the investor who bothers to do a little research can always find growth companies which are traded at a price more than interesting.

   The validity of the GARP method.

   Despite their great popularity among the investors during the 90's decade, the growth style investment strategies were not really the subject of any in-depth studies from the university financial researchers. The difficulty to agree on a general definition of what is called a growth security is undoubtedly related with the lack of interest from the researchers for the various schools of thought which claim to follow the growth philosophy.

   For all kinds of reasons, the value style strategies have generated much more interest among the researchers and continue to fuel their academic works. Like it has been observed that the securities with low price/book, price/earnings, price/sales and price/dividends ratios generate, as a rule, returns higher than the securities having higher ratios, it has been concluded from that that the value style is definitively better than the growth one.

   Then, all the growth type strategies have been put together, without trying to seek the most elementary differences and nuances between them. But especially, people remained blind towards the growth style strategies which could be based on solid grounds and could generate excellent returns.

   One of the rare researchers who have been interested in the growth strategies is Donald Peters, author of A contrarian strategy for growth stocks investing. Although the book had been published in 1993 and that the research data were related to primarily the 80's decade, I'm confident that the conclusions of the author would apply to the 90's decade and that they will still be highly relevant for the 2000 decade.

   His book could have been the spearhead of a series of work about the growth type portfolio management, but that has not been the case. The academic community continues to turn a deaf ear to the works and the research topics explored by Peters. Something still brings some comfort all the same: the less a lucrative investment strategy is known, the longer it lasts and the more intact its future performance remains.

   To be continued in Part 2.

   André Gosselin

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