For many investors, the perennial appeal of fast growing stocks is their ability to deliver outsize capital returns. Forget value, forget dividend income… growth in its purest form is all about fast-paced earnings expansion lighting a fire under share prices. It’s about going big or going home. It’s the classic territory of popular traders like Mark Minervini and William O’Neil – and it’s a strategy that’s made them famous.
But there is another way. Growth investing doesn’t always have to be about buying fast moving shares at any price. Over the years, it has evolved a second strand. Once upon a time growth investors paid little attention to valuation. These days, “growth at a reasonable price” (GARP) is, for some, a much more palatable way of doing things.
Balancing growth and value
One of the early advocates for buying growth stocks at reasonable prices was Peter Lynch. The former Fidelity Investments money manager used what he called the price to earnings growth rate – the PEG – to ensure he wasn’t over paying for expected future growth.
The PEG works by taking last year’s price-to-earnings ratio and dividing it by the consensus forecast earnings growth for the next year. A PEG of…
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