Try Your Luck with a GARP Stock
Posted: November 26, 2019
The demilitarized zone between value investing (bargain hunting) and growth investing (seeking a rapid increase in earnings) is GARP territory.
GARP stands for growth at a reasonable price. It’s an attempt to get some of the benefits of each of the two major stock-picking camps, growth and value.
Generally, I consider a stock to be in the value category if it sells for 15 times earnings or less. Growth stocks usually sell for 20 times earnings or more. From 15 to 20 is GARP land.
I’m a value investor. However, I occasionally will try a GARP pick. In this column, I offer a few of them once a year, around Thanksgiving time.
In 18 columns beginning in 1998, my GARP recommendations have returned an average of 11.7% over 12 months. That beats the 8.8% average return on the Standard & Poor’s 500 Index–an index that lately has seemed invincible.
Here are five new GARP selections.
In 1888, the Texas and Pacific Railway went bankrupt. Stockholders lost everything but bondholders ended up owning the railroad’s land holdings, now called the Texas Pacific Land Trust (TPL).
Based in Dallas, the trust, still traded on the New York Stock Exchange, owns about 900,000 acres of land in West Texas and rents it out for cattle grazing and oil exploration. It also actively buys and sells parcels of land.
For the past five years, this land trust has shown 48% average annual earnings growth; last year was even faster. Encouragingly, TPL has shown a profit each year in the past 15 years. Another strong point: It has enough cash to cover all of its debt.
The stock sells for 17 times earnings.
A power in commercial real estate is CBRE Group (CBRE), out of Los Angeles. It leases and manages properties, and runs various real estate investment programs.
The company grew out of Coldwell Banker’s commercial real estate operations, but it is far larger than its predecessor ever was. Among the firms it swallowed in the past couple of decades are Richard Ellis International Limited, Insignia Financial Group, Trammel Crow Co. and the real-estate business of ING Group.
CBRE’s earnings have grown at a 22% annual clip for the past five years. The stock trades for 18 times earnings.
Based in Zeeland, Michigan, Herman Miller (MLHR) makes office and home furniture. In the past 15 years, Miller has had only one loss, in fiscal 2014. It has bounced back well from that loss, and earned 24% on stockholders’ equity in the past four quarters.
The stock has tripled in price over the past decade. Earnings have grown at a 15% annual pace for the past five years, and the stock sells at 16 times earnings.
Sexy ads and splashy fashions have been hallmarks of Skechers (SKX), a Los Angeles company that markets shoes and clothing, mainly to younger people. Its five-year earnings growth rate is close to 30% a year.
Skechers’ stock has bounced around a lot in the past year, partly because investors are concerned about the Trump administration’s tariffs. (Most athletic shoes are made in China.) On the other hand, Skechers has been increasing its sales to Chinese consumers.
The stock, now near the top of its one-year range, sells for 18 times earnings.
Recycling paper sounds like a boring business. But Kadant (KAI), out of Westford, Massachusetts, has grown its earnings at nearly a 15% pace for the past five years.
Kadant is near the cusp between small-cap and mid-cap stocks, with a market value of about $1 billion. Only three Wall Street analysts follow it; two of them call it a “buy.”
I like stocks off the beaten path, and I’d say Kadant qualifies. I like it at 17 times earnings.
As mentioned above, the S&P 500 Index has been hard to beat lately. The popularity of index investing draws more and more money into the stocks that compose the index.
My GARP selections from a year ago returned 7.7%, but trailed the index’s 16.3% return.
My best result was a 31% gain in CACI International, which provides computer and cybersecurity services, mostly to government bodies. My worst was a 17% loss in Textron (TXT), a conglomerate.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I have no positions, personally or for clients, in the stocks discussed today.