Growth stocks—those with the potential for rapid gains in company revenue and earnings—were the darlings of many investor portfolios in 2023. In particular, the so-called Magnificent Seven mega-cap consumer-tech stocks led the equity market’s rally through the summer. But currently, many of these popular investments have at least one big drawback: They’re pricey, even after the market’s recent pullback. What’s more, these lofty valuations may not be sustainable, as a potentially moderating economy and rapid monetary tightening leave corporate profits increasingly vulnerable.
Can investors still find attractive growth stocks that aren’t overvalued? “GARP”—or “growth at a reasonable price”—stocks exhibit solid growth prospects as well as attractive valuations and a track record of sustained earnings growth. Here’s what to know about this investment approach and where to potentially find opportunities currently.
What is GARP Investing?
Investors seeking growth at a reasonable price should look at features of both growth- and value-oriented investing.
Purely growth-oriented investing favors companies that offer strong potential for earnings growth. Investors are often willing to pay higher valuation multiples for those stocks, given the expectation of high growth. Meanwhile, value investing focuses on companies that have stable cash flows and appear to be undervalued in the marketplace, based on financial metrics such as price/earnings, price/book and debt/equity ratios.
By combining elements from both investing styles, GARP investing has the potential to reward investors with capital growth while reducing their exposure to overvalued, profitless companies.
Why Consider GARP Investing Now?
Morgan Stanley strategists believe the economy is in the late phase of the current business cycle, in which economic activity often peaks while growth slows. In this environment, investors may want to balance “offense,” including growth-oriented positions seeking capital appreciation, with some “defense” that can help buttress their portfolio amid volatility. GARP investing can help with that by seeking to strike a reasonable balance between growth potential and valuation, while avoiding extremes in either regard.
Where Are GARP Opportunities Currently?
GARP investing often requires careful analysis of individual stocks to see if they fit the relevant criteria of growth and value investing. Applying this rigorous analysis, Morgan Stanley’s Global Investment Office has recently found opportunities in certain corners of Technology, Consumer Discretionary and Health Care.