In the 18 months after the EU referendum in mid-2016, growth shares were some of the stock market’s biggest winners. Strategies that zero in on small and mid-cap stocks with fast growing earnings did well. Strategies that chase factors like ‘value’ and ‘quality’ were left trailing in their wake.

But while the EU vote was a springboard for equities, the Brexit ‘bump’ that propelled growth shares didn’t last. By early 2017 growth strategies were coming under pressure and there was a slump in the number of stocks passing their rules. That got worse, and over the past 18 months, growth and momentum strategies have, on average, underperformed almost every other investing style... until recently.

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Source Stockopedia

Since the summer there’s been a pick up in the performance of growth strategies. While it’s too early to tell whether the market is turning bullish on fast-growing shares, it’s evidence at least that stocks offering “growth at a reasonable price” (GARP) are out there - if you know where to look.

So far this year, the guru-inspired GARP strategy tracked by Stockopedia has achieved a steady return of 8.5%. Over five years, the hypothetical return comes in at 107.8% on a pre-costs basis. The strategy looks for strong earnings growth and strong momentum without overpaying for them. There are several ratios that can be used to screen for this kind of share, but a typical GARP screen would look for:

  • Double digit compound earnings-per-share growth rate over three and five years
  • Below average P/E Ratio (and it must be below 20x)
  • Double digit Return on Capital Employed that is growing year-on-year
  • Net margins that are growing year-on-year
  • Positive relative price strength against the market over the past year

A classic example of a share that currently has this kind of profile is Dart Group. Dart is behind the package holiday firm Jet2 Holidays, and also runs a distribution and logistics business. Over the course of nearly a decade, it has been a phenomenal success for investors.

Back in 2012, Dart was a popular value share among DIY stock pickers. Given its highly cyclical nature, the ride for shareholders has sometimes been turbulent, but the impressive returns are undeniable. In the seven years between August 2012 and August 2019, Dart’s share price rose from 73p to 790p - or 930%.

That sounds good, but it actually…

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