A Post-Thanksgiving Feast Of GARP Stocks

GARP stands for growth at a reasonable price. This is the middle ground between value investing (buying what’s unpopular) and growth investing (looking for the next Nvidia).

I’m a dyed-in-the-wool value guy. But once a year in this column, I recommend a few GARP stocks.

To simplify the world, let’s say that value stocks generally sell for less than 15 times the company’s profits per share, or less. Growth stocks generally sell for 20 times earnings or more. In the middle, on GARP ground, are stocks selling for 16 to 19 times earnings. Here are five GARP stocks I like now.

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Cisco SystemsCSCO
, a computer-networking company, was one of the hottest growth stocks of the late 1990s. Now it’s a much more mature company, but still a good one in my opinion.

The company earned $2.82 a share in its latest fiscal year (ended in July). Analysts expect earnings to rise in the current year and the next two years after that, hitting $4.03 a share in fiscal 2025.

With that kind of growth, I’d expect this stock to sell for 20 times earnings or more, but in fact its multiple is 17. Tech stocks in general have been smashed this year, and I believe Cisco—down 23% year to date—is one of many stocks in the sector that are attractive now.

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Another technology stock I like is Texas InstrumentsTXN
. Based in Dallas, the company is one of the largest semiconductor manufacturers in the world, and consistently one of the most profitable. It has earned at least 15% on stockholders’ equity in each of the past 15 years, and more than 30% in seven of those years. In the past four quarters, the figure was a towering 65%.

Texas Instruments is the world’s largest maker of analog chips, used to modulate continuously variable signals such as sound and power. It gets about 95% of its revenue from semiconductors and about 5% from calculators. The stock sells for about 19 times earnings.

A mid-sized company that has grown fast is StrideLRN
, an online education company. During the pandemic, it served homebound students from kindergarten through seniors in high school. With progress against Covid-19, that business is fading, but career education and adult education are growing.

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My reasoning here is crude, but I think right. People are very busy, and yet educational credentials are essential for career advancement. That gives an edge to online learning programs, especially those (like most of Stride’s) that are sponsored by recognized schools. The stock is at 17 times earnings.

Darling Ingredients (DAR) and recycles various food waste materials such as used cooking oil and bakery remnants. It transforms these into animal feed, food ingredients (such as gelatin) and fertilizer. It has shown a profit in each of the past 15 years and profits have accelerated lately.

The company has made a few acquisitions recently, which has caused it to run up its debt. Debt is still less than stockholders’ equity, but only narrowly so. The stock sells for 16 times earnings—but only 11 times the earnings analysts expect in 2023.

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Regeneron PharmaceuticalsREGN
, based in Tarrytown, New York, is a biotech company that already has several products on the market. Its biggest sellers are the eye medication Eylea (about $9 billion per year in sales), Regen-Cov for Covid-19 (more than $7 billion) and Dupixent which treats several conditions, including eczema and esophagitis (about $6 billion).

Regeneron’s 10-year sales growth rate is about 30% per year. Considering that, I’d say the stock is modestly priced at a little over 15 times earnings.

The Record

This is the 22^nd column I’ve written about GARP stocks. The average one-year return on my recommendations in this series has been 10.6%, a bit better than the 9.2% average for the Standard & Poor’s 500 Total Return Index over the same periods.

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Thirteen of the 21 columns have been profitable, and 12 have beaten the S&P 500. Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Last year’s column had the second-worst results in the entire series. All five of my selections declined, with an average loss of 29.96%. The worst performer was T. Rowe Price Group Inc., down 38%. For comparison, the S&P 500 Total Return Index was down 13.13%.

Disclosure: I own Texas Instruments personally and for almost all of my clients.