Screen Potential Candidate EP IV

GARP (Growth at Reasonable Price)

Contrarian plays have long been attractive strategies for those investors who do not have the stomachs for high-ratio stocks. By their very nature, these types of strategies expose stocks that have fallen from grace within the eyes of the markets. They also find ones that have never caught fire while growing at rates appropriate to their underlying fundamentals.

Somewhere in between the world of growth and value investing is the GARP (growth at a reasonable price) patron. This theory focuses on finding opportunities with a modest risk within the realm of smaller capitalization stocks. To control risk, companies with proven management structures with sound balance sheets and strong standings in their industries, while simultaneously avoiding those that are already overpriced.

Criteria We Used:

1. Market Cap less than 1 Billions.
2. Income Per Employee more than Industry Average.
3. Inventory Turnover more than Industry Average.
4. D/E less than 50%.
5. 5-Year Revenue Growth more than 20%.
6. EPS Growth Next 5 Years as High as possible.
7. P/E Ratio less than EPS Growth Next 5 Years.
8. PEG Ratio Below 1.

The information returned from this hybrid technique, which employs multiple levels of filters, will help find additional opportunities for investment. For the most part, looking at both the income per employee and the inventory turnover helps to seek out those companies that have an edge over their industry constituents. Each of the resulting stocks from this screen likely reflects the company’s ability to understand the distribution and manufacturing process of the goods they are selling.

When a company consistently shows the ability to be a leader within these two important areas, there may be something further to review.

Debt to equity is very important to keep at a minimum, especially in smaller companies. The impact of large debt loads are most pronounced with small-cap firms. As this screen hunts for companies with market capitalization of under $1 billion, this particular overlay provides a better positioning with companies that have lower than average debt.

Finally, the earnings per share (EPS) and PEG ratio fields filter for stocks that show reasonable growth. The requirement to screen out those companies with PEG ratios above one and those that have P/E ratios above their projected EPS growth rates is very important. By doing so, it will be clear that the results will have analysts showing that they believe in the stock’s prospect for growth and that most investors have not over exaggerated the buying. Therefore, the current price is in line or lower than it should be, taking into consideration earnings and earnings growth.