Are investors paying too much for growth stocksA stock whose issuing company is expected to grow at a significantly higher rate than the market.? Some fund manager and investors claim better results can be obtained by opting for securities which provide “growth at a reasonable price,” and paying close attention to valuation ratios when investing. In our webinar Rocket or Rollercoaster: Where Will the Markets Go From Here?, Vice President and Portfolio Manager Charlie Toole offered our view on the so-called GARP investment philosophy.
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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GARP, or growth at a reasonable price, is attractive to investors because you’re buying companies or stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. of companies that have strong fundamentals, but you’re not overpaying.
It’s very similar to the style of investing that Warren Buffett employs, buying high-quality companies at reasonable prices. In my opinion, growth stocks are attractive as we enter the next stage of the economic recovery. And paying a reasonable price is always a sound investment strategy.
We’ve talked about the sharp bounce back that we’re seeing in earnings and economic growth, and that’s typical for the early stage of a recovery. And with those sharp bounce backs and those high growth rates, we’ve seen cyclical sectors like energy and bank stocks specifically lead the market. And again, that’s a typical of an early part of the economic recovery.
But those GDP growth rates and earnings growth rates are soon going to be peaking at their highest levels. After that, we’ll start to get into a normal economic environment. For instance, GDP is expected to drop from about 8% in the past quarter to under 3% in the second quarter of 2022.
GARP investing does particularly well when GDP is slowing but remains positive. And I think that’s the environment we’re going to find ourselves in the next several months and several quarters.
*Webinar recorded after the market closed on Wednesday, July 28, 2021.
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