GARP Stocks: Common Sense in an Age of False Narratives

What Are GARP Stocks & Why Focus on them Now?

  • Our last missive on Advisor Perspectives explained why swapping out SMID Growth for SMID Value could help build a margin of safety into client portfolios
  • This post explains why we believe GARP Investing may be another powerful way to protect and grow capital amid a speculative frenzy that appears to be on its way out
  • We believe buying cheap, high-quality stocks that are growing profits faster than the index has never been more appealing than it is today

For the purposes of this paper, we will use KCR’s GARP Portfolio for illustrative purposes. We believe the opportunity vs. the benchmark is so vast that almost any GARP methodology will produce solid risk-adjusted returns. If you would like us to run another firm’s portfolio through our scoring system to check for factor exposure, let us know. We make no claims to a monopoly on great investment processes.

GARP strategies have almost been forgotten. Our team of veteran managers would happily recommend other proven GARP managers with track records longer than our own.

Our Growth at A Reasonable Price portfolio focuses on mispriced growth stocks and has been in production since 2012. With high concentration and low turnover, the portfolio underperformed the Russell 2500 Growth Index from 2018 - 2020. As documented extensively in our research, the period from 2017 - 2020 represented a speculative excess that eclipsed the mania.

The good news is our model portfolio - like almost any honest GARP strategy - has experienced a significant rebound. This paper offers a brief review of why we believe the model’s recent success is likely to continue and why investors should be focusing on putting money to work in mispriced growth now.

Figure 1 below shows the valuation of the Russell 2500G in light blue and KCR’s GARP Investment Portfolio in navy blue. We believe that the valuation spreads between the index and our GARP portfolio will continue to converge from never-before-seen spreads.

Index Investing & the Missing Margin of Safety in One Chart