Growth at a reasonable price (GARP) is a popular strategy that fuses attributes of growth investing and value investing. The most well-known practitioner of GARP investing is Peter Lynch who posted an impressive average annual return of 29.2% during his 13 years running the Magellan Fund.
GARP’s value discipline helps weed out the most overvalued growth stocks, while its growth component helps investors avoid value traps. One way to track the performance of GARP stocks is with the Invesco S&P 500 GARP ETF (SPGP). This ETF tracks a basket of stocks that have above-average growth rates with reasonable valuations. It’s outperformed so far this year with a 19.2% gain which is significantly better than the S&P 500’s 11.9% YTD gain.
I thought this is an apt time to highlight some GARP stocks given that we’ve experienced a significant correction in growth stocks over the past couple of months. Although the correction may not be over, it has created some interesting opportunities in high-quality GARP stocks. Here are 3 that investors should consider: Synchrony Financial (SYF), PulteGroup Inc. (PHM), and Cigna Corp. (CI).
Synchrony Financial (SYF)
SYF is a consumer financial services company that was spun off from GE Capital in 2014. Its original focus was on credit cards for retailers, and it provides back-end financial services for many store-branded credit cards.
The company has also expanded into other areas including consumer deposits and providing credit services for healthcare providers, travel, and home improvement. Currently, it has financed $139 billion in sales and has 68.5 million accounts.
Sellers are eager to work with SYF because it can increase sales by offering financing options to potential customers. For a fee, SYF takes on the credit risk. This means that SYF has significant exposure to consumer finances. So, it’s not surprising that the company is doing well in the current environment with low rates, strong consumer spending, and low default rates.
This was evident in its recent earnings report which showed a 198% increase in EPS compared to last year’s Q1. It also topped consensus earnings expectations by 15% and issued guidance above forecasts as well. Due to these strong results, the company announced a $2.9 billion share buyback which is more than 10% of its total value.
Despite this growth, SYF is extremely reasonably priced with a forward price to earnings ratio of 8.3. So, it’s no surprise that SYF has an overall rating of B, equating to a Buy in our POWR Ratings system. B-rated stocks have an average annual performance of 19.7%, while the S&P 500 has posted an average annual return of 7.1% over the same period.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. It also evaluates stocks by various components including Value, Growth, Momentum, Stability, Sentiment, Quality, and Industry. To see SYF’s component grades, please click here.
PulteGroup Inc. (PHM)
PHM is the third-largest homebuilder in the US. It operates across the US and serves various markets including single-family homes, townhouses, condominiums, and duplexes. Its most well-known brands include Centex, Pulte Homes, and Del Webb. It derives the bulk of its revenue from homebuilding and financial services.
PHM has been thriving due to the hot housing market which is fueled by the low inventory of available homes. By some measures, there are more real estate agents than houses for sale in the country. This is leading to rising prices which is resulting in more new construction.
PHM’s recent results corroborate this narrative. In its last quarter, the company’s revenue was $2.7 billion, a 19% increase from 2020’s Q1. Net income was 49% higher at $304 million. Both figures were above expectations, and the company has now beat for 4 straight quarters. Another interesting point is that net margins remained stable which indicates that the company can pass on higher input costs to customers - another indication of the housing market’s strength.
PHM’s POWR Ratings are consistent with this outlook. The stock has an overall B rating, which equates to Buy in the POWR Ratings system. PHM has a B for Quality which is consistent with the company’s pricing power. The stock is also liked by Wall Street analysts as they have a consensus price target of $72.20 which implies a 26% upside.
Cigna Corp. (CI)
CI is a multinational managed healthcare and insurance company with various subsidiaries that offer medical, dental, disability, life, and accident insurance. It also offers Medicare and Medicaid plans and products. The majority of its plans are offered through employers and large organizations. It operates through three segments—Evernorth, U.S. Medical and International Markets.
The rising cost of healthcare means that health insurers have also prospered. These stocks tend to outperform during periods of rising employment as this means more people will be enrolled in Cigna’s insurance plans. Thus, the company weakened as jobs were shed during the coronavirus crisis last year. However, it staged an impressive rebound as the economy has started to recover.
This is evident from its last earnings report which showed a 9% increase in revenue from last year to $41.7 billion, topping expectations. Net income increased 323% to $4.1 billion. As a result, analysts hiked their outlook for its full-year results. Currently, they are projecting EPS of $20.26 and revenue of $169 billion with both figures representing a 9% increase from 2020.
CI’s earnings reflect its above-average growth prospects. However, it has a price to earnings ratio of 11 which means it’s significantly cheaper than the S&P 500’s price to earnings ratio of 44.
The stock has an overall A rating, which equates to a Strong Buy in the POWR Ratings. A-rated stocks have posted an average annual performance of 30.7%. In terms of its components, CI has a B for Value. Even if looking at its forward price to earnings ratio of 11.4, it remains cheaper than the S&P 500 by more than 50%.
To see CI’s other component grades including Growth, Stability, Sentiment, Momentum, Quality, and Industry, please click here.
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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com. Jaimini has been dialed into the hottest trends in investing:
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SYF shares were trading at $46.84 per share on Wednesday afternoon, up $0.58 (+1.25%). Year-to-date, SYF has gained 36.45%, versus a 12.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.
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