In our recent review of the strategy styles that paid off in the first half of 2015, it was Growth investing that led the pack. In particular, it was those strategies that appeal to both growth hunters and value investors that proved to be some of the strongest performers. ‘Growth at a reasonable price’, or GARP investing, is a hallmark of some of the world’s best known finance legends - and it’s finding a sweet spot in the current market conditions.
Investors like Peter Lynch, Thomas Rowe Price Jr., Jim Slater and Jason Zweig forged their reputations by hunting down high growth companies without overpaying for them. While their favoured ratios and metrics differ slightly, the thrust of the strategies is the same.
Rapid and persistent earnings growth
Chief among the rules is a track record of earnings growth. In his book One Up on Wall Street, Peter Lynch, the ex-Fidelity fund manager, is emphatic about the importance of earnings. “If you can follow only one bit of data, follow the earnings... I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities.”
Earnings growth was also a central tenet of an approach used by the late American investor, Thomas Rowe Price Jr. Back in the 1930s he earned a reputation as the ‘father of growth investing’ with a strategy that looked for a long-term rising trend in earnings per share (EPS). Stockopedia’s modelling of that strategy - which looks for above-average compound earnings growth over three and five years - has generated a 15.2% return during the last six months.
For the late US money manager Martin Zweig, EPS growth was also crucial. Our modelling of his approach is more specific than Rowe Price. It looks for firms that achieve compound earnings growth of greater than 15% over three years. It’s a strategy that has returned 12.3% in the UK this year - and an impressive 21% in Europe.
Growth at a reasonable price
Beyond earnings growth, GARP investors typically look for companies with below-average valuations. Often, that means using the price-to-earnings (PE) ratio as a yardstick for cheapness. Two growth investors that took that further were Peter Lynch and Jim Slater. They applied differing versions of something called the PEG - or price-earnings to growth rate - to measure the relationship between value and growth.
The aim of the PEG is to buy…
