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reddingrunner (92.77)

GARP Again



August 24, 2007 – Comments (0)

Following up on yesterday's post:

GARP is based on PEG and the G in PEG stands for "Growth" but could also stand for "Guess" since all predictions are ultimately guesses.  There are two primary ways I try to protect myself against overly optimistic growth projections:

1. My main "screen", subjective though it is, is by simply looking at the company and what it makes and its strategy and numbers and its moat and whether or not it is well-positioned to take advantage of long-term megatrends. 

(Obviously this means I end up biased toward companies and business models I can understand vs those I don't - like semi-conductors for example. By the same reasoning, I tend to avoid retailers since I'm not much of a shopper and I don't know how to separate the winners from the losers).

The two main megatrends I rely on are the aging of the baby boomers and the worldwide economic and building boom which I believe is still in its infant stages.  Thus I'm bullish on natural resources and commodities and construction equipment and financials and health care and ... well, you get the picture.  It's easier to feel confident about a company's growth if it is in a growing sector.  Duh! 

2. I also look for companies whose future growth projections are lower than past growth (five years vs five years).  While past growth often isn't sustainable, analysts also don't like to project more than 15% future growth:  even if they think a company might grow faster, so few do that a conservative bias leads them to generally say 15% if they think growth will be 15% OR HIGHER.  When a higher rate IS predicted, I become very interested (if the P/E is still reasonable).  

So, give me a company (for example) that I can understand with an historical growth rate of 40% annually, a predicted 5-year growth rate of 18%, a P/E of 15, in an industry I expect to grow faster than the economy (or with a big moat) and I'm ready to take a close look.

This isn't the only way I pick stocks for CAPS, just the main way.

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