GARP Investing - Growth and Value criteria combined
2016 Year-end Target: 1,750 points (under review) FBM KLCI: 1,629.32 points
• GARP Investing is… Growth at Reasonable Price (GARP) investing combines both Growth and Value criteria for stock selection. It seeks to acquire stocks that have solid growth prospects, but are available at reasonable/ discounted prices; a crossover of sorts. Proponents of the GARP philosophy believe in finding stocks that have a high expected growth but yet have comparatively lower valuation multiples, and are thus ‘cheaper’.
• …dissimilar to blend strategy. Unlike a blend strategy, a portfolio which is constructed using GARP investing is generally made up of stocks that offer the best of both value and growth investing rather than investing in both value and growth stocks. In essence, the main objective of GARP strategy is to circumvent the extremities of either growth or value investing by selecting stocks that have both low relative valuations and high growth rates.
• In our GARP strategy studies, we applied 8 fundamental parameters on each of FBM100 component stocks and they are (i) Price to Sales Ratio, (ii) Sales CAGR, (iii) Forward PEG Ratio, (iv) EPS Growth, (v) Return on Invested Capital, (vi) EV to EBITDA Ratio, (vii) Earnings Yield, and (viii) Operating Income Growth. Each of these parameters is scored and ranked. The ranking position of each parameter is then added together to arrive at a total. This total is then ranked and sorted from best to worst. Only stocks in the top quartile are selected.
• Based on our empirical findings (a 5.83-year back testing from 1 January 2012 to 31 October 2016), most of the top quartile stocks selected using GARP strategy exhibited positive price return performance in the short term.
This led us to conclude that GARP strategy can be used on individual stocks in Bursa even for short periods of not more than 3 months. On this score, when the price return objective is achieved, profit taking is recommended in order to safeguard portfolio value. Refer to APPENDIX for more details.
• The latest data ranking with a start date of 7 November 2016 (refer to Table below) returned UOA Development, AirAsia and Press Metal as the top 3 stock picks. It must however be noted that in the GARP study, the momentum factor was not considered thus timing was not a part of the analysis. However, our stock recommendations would take into account the recent price behaviour as well as inputs from our analysts and economists into consideration.
• …dissimilar to blend strategy. Unlike a blend strategy, a portfolio which is constructed using GARP investing is generally made up of stocks that offer the best of both value and growth investing rather than investing in both value and growth stocks. In essence, the main objective of GARP strategy is to circumvent the extremities of either growth or value investing by selecting stocks that have both low relative valuations and high growth rates.
• In our GARP strategy studies, we applied 8 fundamental parameters on each of FBM100 component stocks and they are (i) Price to Sales Ratio, (ii) Sales CAGR, (iii) Forward PEG Ratio, (iv) EPS Growth, (v) Return on Invested Capital, (vi) EV to EBITDA Ratio, (vii) Earnings Yield, and (viii) Operating Income Growth. Each of these parameters is scored and ranked. The ranking position of each parameter is then added together to arrive at a total. This total is then ranked and sorted from best to worst. Only stocks in the top quartile are selected.
• Based on our empirical findings (a 5.83-year back testing from 1 January 2012 to 31 October 2016), most of the top quartile stocks selected using GARP strategy exhibited positive price return performance in the short term.
This led us to conclude that GARP strategy can be used on individual stocks in Bursa even for short periods of not more than 3 months. On this score, when the price return objective is achieved, profit taking is recommended in order to safeguard portfolio value. Refer to APPENDIX for more details.
• The latest data ranking with a start date of 7 November 2016 (refer to Table below) returned UOA Development, AirAsia and Press Metal as the top 3 stock picks. It must however be noted that in the GARP study, the momentum factor was not considered thus timing was not a part of the analysis. However, our stock recommendations would take into account the recent price behaviour as well as inputs from our analysts and economists into consideration.
Table 1: Data Ranking 
RECOMMENDATION
• Top 3 picks. Based on (i) the ranked quantitative findings (refer to Table above), (ii) price behaviour of respective stocks during the past weeks, (iii) our analysts’ views (i.e. positive expected share price return and BUY recommendation), and (iv) our economists’ USD/MYR year-end target of 4.35, we list below our top 3 stock picks to take advantage of the GARP investing:
• Top 3 picks. Based on (i) the ranked quantitative findings (refer to Table above), (ii) price behaviour of respective stocks during the past weeks, (iii) our analysts’ views (i.e. positive expected share price return and BUY recommendation), and (iv) our economists’ USD/MYR year-end target of 4.35, we list below our top 3 stock picks to take advantage of the GARP investing:
AirAsia (BUY; TP: RM3.34)
Tenaga Nasional (BUY; TP: RM16.80)
Kuala Lumpur Kepong (BUY; TP: RM29.05)
• FBM KLCI year-end targets. In view of the recent market volatilities, we put under review (downward bias) our FBM KLCI 2016 year-end target of 1,750 points which equates to PER16 of 17.5x. However, we reaffi rm our 2017 year-end target of 1,830 points which equates to PER17 of 17.0x.
source: MIDF Research – 23/11/16
