Seeking Alpha

Growth At A Reasonable Price (GARP) Strategy For October

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Includes: AMTD, BWA, CM, CMI, CR, DRI, EVR, ITRN, LEA, LYB, MED, MEOH, MGRC, NTB, PZN, UNH
by: Fredrik Arnold
Fredrik Arnold
Dividend investing, Growth, momentum, research analyst
Summary

The Growth At A Reasonable Price (GARP) strategy seeks stocks with price/earnings growth ratios of one or less, showing P/E in line with expected earnings, thus, trading at reasonable prices.

5 of 35 GARP strategy stocks tracked by YCharts showed dividends >4% as of 10/8/19. Top-ten ranged 3.09%-6.8% by yield and ranged 25.37%-97.89% by broker price-target-upsides.

Ten top net gain GARP strategy dividend dogs boasted broker-estimated net gains from 27.96% to 99.92%.

$5k invested in the lowest-priced five top-yield GARP-selected dividend dogs showed 9% more net-gain than from $5k invested in all ten. Little low-priced GARP-select dogs ruled this pack.

YCharts states it selects stocks daily based on the GARP screen. The list has one caveat: "what worked in the past is never guaranteed to work in the future."

Foreword

A previous series of articles looked at (1, 2, & 3) billionaire and hedge fund holdings beginning with 50 Kiplinger stocks selected from individual holdings of high net worth notables as penned by James Brumley, an author for Kiplinger.

Then (4) we surveyed Warren Buffett and his Berkshire Hathaway collection of dividend dogs, followed by (5) a survey of 61 Solid Goldman Sachs dividend holdings, and then (6) looked at the dogs of BlackRock, the world's biggest manager of fund holdings, went on to (7) survey Soros Fund holdings, and finished with a look at (8) Neuberger Berman equities, and (9) Renaissance-Medallion dividend stocks.

Late Summer, a previous series of "by the book" articles looked at five essential published investment strategies named for Ben Graham, Growth at a Reasonable Price, Peter Lynch, Large Cap Value, and Dividend Power.

This Fall season brings the I-V.01 updates to those previous articles: Graham I.01; GARP II.01; Lynch III.01; LC Value IV.01; DiviPower V.01.

Actionable Conclusions (1-10): Brokers Estimated 27.9% To 99.99% Net Gains For Ten Top GARP Dividend Dogs Come October 2020

Four of ten top GARP Selections by yield were among the top ten gainers for the coming year based on analyst 1-year target prices. (They are tinted gray in the chart below). Thus, this yield-based forecast for growth at a reasonable price selected dogs was graded by Wall St. Wizards as 40% accurate.

Projections were based on estimated dividends from $1000 invested in each of the highest yielding stocks and their aggregate one year analyst median target prices, as reported by YCharts. Note: one year target prices by lone analysts were not applied. Ten probable profit-generating trades projected to October 8, 2020 were:

Source: YCharts.com

Medifast Inc. (MED) was projected to net $999.29, based on the median of target price estimates from three analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risk 31% less than the market as a whole.

Crane Co. (CR) was projected to net $374.50, based on the median of target price estimates from nine analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to risks 35% more than the market as a whole.

Evercore Inc. (EVR) netted $373.49 based on the median of estimates from nine analysts, plus dividends. The Beta number showed this estimate subject to risks 35% more than the market as a whole.

Bank of N.T. Butterfield & Son LTD. (NTB) was projected to net $352.20 based on dividends, plus the median of target estimates from six brokers, less transaction fees. A Beta number was not available for NTB.

BorgWarner Inc. (BWA) was projected to net $328.77, based on dividends, plus the median of target price estimates from twenty-one analysts, less broker fees. The Beta number showed this estimate subject to risks 85% more than the market as a whole.

UnitedHealth Group Inc. (UNH) was projected to net $324.40, based on dividends, plus the median of target price estimates from twenty-seven analysts, less broker fees. The Beta number showed this estimate subject to risks 40% less than the market as a whole.

Methanex Corp. (MEOH) was projected to net $313.94, based on a median of target price estimate from fourteen analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risks 77% more than the market as a whole.

Lear Corp. (LEA) was projected to net $313.59, based on dividends, plus a mean target price estimate from twenty analysts, less broker fees. The Beta number showed this estimate subject to risk 58% over the market as a whole.

McGrath RentCorp (MGRC) was projected to net $282.18, based on the median of target estimates from three analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risks 22% less than the market as a whole.

TD Ameritrade Holding Corp. (AMTD) was projected to net $279.64, based on dividends, plus the median of target price estimates from nineteen analysts, less broker fees. The Beta number showed this estimate subject to risk 22% more than the market as a whole.

The average net gain in dividend and price was estimated at 39.42% on $10k invested as $1k in each of these ten stocks. These gain estimates were subject to average risks 31% more than the market as a whole.

Source: insidermonkey.com

The Dividend Dogs Rule

Stocks earned the "dog" moniker by exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs." More precisely, these are, in fact, best called, "underdogs".

The Growth At A Reasonable Price (GARP) Selections For October 2019

How did this collection of 35 GARP select dogs come to be?

Growth at a reasonable price (GARP) is an equity investment strategy that seeks to combine tenets of both growth investing and value investing to select individual stocks. GARP investors look for companies that are showing consistent earnings growth above broad market levels while excluding companies that have very high valuations. The overarching goal is to avoid the extremes of either growth or value investing; this typically leads GARP investors to growth-oriented stocks with relatively low price/earnings (P/E) multiples in normal market conditions. Source: YCharts.com

35 GARP Selections By Broker Target Gains

Source: YCharts.com

35 GARP Selections By Yield

Source: YCharts.com

Actionable Conclusions (11-20): 10 Top GARP Stocks By Yield

Top ten growth at a reasonable price stocks selected 10/8/19 by yield represented five of eleven Morningstar sectors.

Top dog by yield was one of five financial services GARP holdings, Pzena Investment Management Inc. (PZN) [1]. The others placed second, third, seventh and ninth: Bank of N.T. Butterfield & Son Ltd. [2], Canadian Imperial Bank of Commerce (CM) [3], TD Ameritrade Holding Corp. [7], and Evercore Inc. [9].

Two basic materials firms placed fourth and fifth, LyondellBasell Industries NV (LYB) [4], and Methanex Corp. [5]. A single technology firm claimed sixth place, Ituran Location and Control Ltd. (ITRN) [6].

One industrials representative placed eighth, Cummins Inc. (CMI) [8], and finally, one consumer cyclical sector representative placed tenth on this list, Darden Restaurants Inc. (NYSE:DRI) [10], to complete the growth at a reasonable price selected top ten dogs by yield.

Actionable Conclusions: (21-30) Top Ten October GARP Selected Dogs Showed 25.37%-97.89% Upsides While (31) One Downsider showed -0.68%

Source: YCharts.com

To quantify top dog rankings, analyst median price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high-yield metrics, analyst mean price target estimates became another tool to dig out bargains.

Analysts Forecast A 9% Advantage For 5 Highest Yield, Lowest Priced GARP Selected Dividend Stocks To 2020

Ten top GARP dividend dogs were culled by yield for this update. Yield (dividend/price) results provided by YCharts did the ranking.

Source: YCharts.com

As noted above, top ten GARP Selected dividend dogs of 10/8/19 showing the highest dividend yields represented five of eleven Morningstar sectors.

Actionable Conclusions: Analysts Predicted 5 Lowest-Priced Of The Top Ten Highest-Yield GARP Dogs (32) Delivering 22.79% Vs. (33) 20.9% Net Gains by All Ten Come October, 2020

Source: YCharts.com

$5000 invested as $1k in each of the GARP selected kennel by dividend yield were predicted by analyst 1-year targets to deliver 9% more gain than $5,000 invested as $.5k in all ten. The sixth lowest priced selection, Evercore Inc., was projected to deliver the best net gain of 37.35%.

Source: YCharts.com

The five lowest-priced top-yield GARP Selected dividend dogs as of October 8 were: Pzena Investment Management Inc.; Ituran Location and Control Ltd.; Bank of N.T. Butterfield & Son Ltd.; Methanex Corp.; TD Ameritrade Holding Corp., with prices ranging from $8.53 to $33.42.

Five higher-priced GARP Selected dividend dogs as of October 8 were: Evercore Inc.; Canadian Imperial Bank of Commerce; LyondellBasell Industries NV; Darden Restaurants Inc.; Cummins Inc., whose prices ranged from $73.96 to $153.14.

The distinction between five low-priced dividend dogs and the general field of ten reflected Michael B. O'Higgins' "basic method" for beating the Dow. The scale of projected gains based on analyst targets added a unique element of "market sentiment" gauging upside potential. It provided a here-and-now equivalent of waiting a year to find out what might happen in the market. Caution is advised, since analysts are historically only 20% to 80% accurate on the direction of change and just 0% to 20% accurate on the degree of change.

The net gain/loss estimates above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Stocks listed above were suggested only as possible reference points for your By The Investment Book Picks stock purchase or sale research process. These were not recommendations.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.indexarb.com; YCharts; finance.yahoo.com; analyst mean target price by YCharts. Dog photo: insidermonkey.com

Disclosure: I am/we are long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.