GARP investing: growth at a reasonable price

Value investors hunt for cheap stocks and growth investors chase fast earnings growth. Growth at a reasonable price sits between the two: it wants growth, but only at a sensible price. Peter Lynch, who managed the Fidelity Magellan fund from 1977 to 1990, described the approach in his book One Up on Wall Street. He popularised the rule of thumb that a fairly priced company has a P/E ratio roughly equal to its growth rate, which is the thinking behind the PEG ratio.

Lynch also sorted companies into categories such as slow growers, stalwarts, fast growers, cyclicals, turnarounds and asset plays, and looked closely at balance sheets. Stock Meadow cannot replicate that judgement, but it can score the measurable parts: the price paid for growth, the growth itself, the returns earned on capital, and the debt carried.

Each stock receives a 0–100 score on four measures, blended with fixed weights (a total of 8):

• Forward PEG (weight 3): forward P/E divided by positive expected annual EPS growth, in percentage points. Lower scores higher.
• EPS growth (weight 2): how fast diluted earnings per share grew last year. Higher scores higher.
• Return on invested capital (weight 2): after-tax operating income divided by invested capital, so the growth is earned on good returns. Higher scores higher.
• Net debt / EBITDA (weight 1): years of earnings needed to repay debt. Lower scores higher, and net cash scores best.

Each measure is ranked as a percentile against the other stocks: the best scores 100, the worst 0, and equal values share the midpoint. The overall score is the weighted average.

Assume ten fictional companies pass the same filters and have complete data. Company A is scored against the other nine. The figures are made up for illustration and do not describe any listed company.

GARP score = 233.4 + 133.4 + 155.6 + 55.6 = 578.0, divided by the total weight of 8, gives 72.3 out of 100. The score describes A's position among these ten companies; it is not a forecast of its return.

1. Choose GARP (Peter Lynch) in the scoring-model picker.
2. Add any filters. For a stricter list, try a Forward PEG filter such as below 1.5.
3. Open a stock's breakdown to see its score on each measure.

The model uses this fixed recipe, so metric Score switches and custom weights don't change it, although filters still apply. It only scores stocks with a positive forward PEG and positive EPS growth last year, plus return on invested capital and net debt / EBITDA. That leaves out companies with losses, shrinking expected earnings or no forecast, and banks and insurers, which have no return on invested capital or debt ratios. At least ten eligible stocks are needed, and you can compare each stock within its own sector. See the full methodology.

Scores are relative. The top stock is the best of your screen, not necessarily one with a PEG below 1.

• Forecasts can be wrong. The forward PEG rests on expected growth, which is an estimate and can change often.
• Last year's EPS growth can flatter. A rebound from a weak year or a share buyback can raise it without real expansion.
• It does not read the story. Lynch's method depended on understanding each business, which a score can't do.
• Growth can fade. A fast grower's expected growth rate may not last.

Stock Meadow's scores are research tools based on reported financial data. They do not predict returns or recommend buying a particular stock.

Peter Lynch with John Rothchild, One Up on Wall Street (1989), and Beating the Street (1993). This guide describes Stock Meadow's implementation; Stock Meadow is independent of those publications. For a value-and-quality alternative, read the Magic Formula guide.

Each measure has its own page with a formula, how to read it and common pitfalls.

• Forward PEG Ratio: price vs. profit, adjusted for expected growth.
• EPS Growth: how fast profit per share grew last year.
• Return on Invested Capital (ROIC): profit made on all money invested in the business.
• Net Debt to EBITDA: years of earnings needed to pay off debt.

What does GARP stand for?

GARP stands for growth at a reasonable price. It looks for companies whose earnings are growing, without paying a high price for that growth.

What is a good PEG ratio?

A PEG of about 1 or below is often read as paying a fair price for growth, and lower is cheaper. It relies on a growth forecast, so treat it as a starting point and check how reliable the forecast is.

How is Stock Meadow's GARP model different from Peter Lynch's own approach?

Lynch studied companies one by one, sorting them into categories and reading the business story. Stock Meadow's model is a rules-based score built on forward PEG, EPS growth, return on invested capital and debt, inspired by his idea but not a copy of his method.

Why are some growth stocks missing from the GARP results?

The model needs a positive forward PEG and positive EPS growth, plus return on invested capital and a debt ratio. Companies with losses, shrinking expected earnings, no forecast, or (like banks) no return-on-capital figure are listed as unranked with the reason.