Morgan Stanley
Wealth Management

Investing for Growth at a Reasonable Price

Oct 25, 2023

How can you find stocks with strong growth potential at attractive prices? Combining two popular investing strategies may help.

Author
Dan Skelly

Key Takeaways

  • A strategy known as “GARP”—or “growth at a reasonable price”—seeks stocks with strong growth potential that aren’t overvalued.
  • With the economy potentially slowing in the near term, GARP stocks may provide a useful balance of offensive and defensive qualities.
  • Investors may want to consider select opportunities in the technology, consumer discretionary and health care sectors. 

Growth stocks—those with the potential for rapid gains in company revenue and earnings—were the darlings of many investor portfolios in 2023. In particular, the so-called Magnificent Seven mega-cap consumer-tech stocks led the equity market’s rally through the summer. But currently, many of these popular investments have at least one big drawback: They’re pricey, even after the market’s recent pullback. What’s more, these lofty valuations may not be sustainable, as a potentially moderating economy and rapid monetary tightening leave corporate profits increasingly vulnerable.

 

Can investors still find attractive growth stocks that aren’t overvalued? “GARP”—or “growth at a reasonable price”—stocks exhibit solid growth prospects as well as attractive valuations and a track record of sustained earnings growth. Here’s what to know about this investment approach and where to potentially find opportunities currently.

What is GARP Investing?

Investors seeking growth at a reasonable price should look at features of both growth- and value-oriented investing.

 

Purely growth-oriented investing favors companies that offer strong potential for earnings growth. Investors are often willing to pay higher valuation multiples for those stocks, given the expectation of high growth. Meanwhile, value investing focuses on companies that have stable cash flows and appear to be undervalued in the marketplace, based on financial metrics such as price/earnings, price/book and debt/equity ratios.

 

By combining elements from both investing styles, GARP investing has the potential to reward investors with capital growth while reducing their exposure to overvalued, profitless companies.

Why Consider GARP Investing Now?

Morgan Stanley strategists believe the economy is in the late phase of the current business cycle, in which economic activity often peaks while growth slows. In this environment, investors may want to balance “offense,” including growth-oriented positions seeking capital appreciation, with some “defense” that can help buttress their portfolio amid volatility. GARP investing can help with that by seeking to strike a reasonable balance between growth potential and valuation, while avoiding extremes in either regard.

Where Are GARP Opportunities Currently?

GARP investing often requires careful analysis of individual stocks to see if they fit the relevant criteria of growth and value investing. Applying this rigorous analysis, Morgan Stanley’s Global Investment Office has recently found opportunities in certain corners of Technology, Consumer Discretionary and Health Care.

  1. 1
    Technology:

    Though Tech is often associated with growth and, by extension, overvaluation, GARP opportunities do exist in this sector. For example, investors may want to look at global semiconductor companies trading at a discount to peers, particularly those that may be poised to gain market share or grow earnings as they ride the wave of secular shifts in the digital economy, including developments in artificial intelligence. Meanwhile, certain market reaction to material corporate events may lower valuation metrics and present buying opportunities: for instance, an earnings miss that is probably a one-time blip that nonetheless prompts a selloff.

  2. 2
    Consumer Discretionary:

    This sector consists of companies offering non-essential consumer goods or services, such as apparel, furniture and food service. In this sector, GARP investing favors small but fast-growing consumer goods companies in niche markets that have sustainable competitive advantages, such as a marketing strategy that’s hard to imitate. Such advantages can lead to higher returns on capital and might make companies more resilient against new entrants. Look for trends in both sales and input costs, as well as management’s guidance for future quarters and years. 

  3. 3
    Health Care:

    Within this sector, pharmaceutical and med-tech companies that have a robust pipeline of developing products, rather than a wish list of early-stage ideas, tend to provide better returns. Investors may want to zero in on companies with valuation ratios below the market’s multiples as well as the company’s own long-term average. Health Care, broadly, is considered an area that can offer a combination of both growth and value attributes: The sector tends to be resilient during market downturns, given steady demand for medical care, while powerful innovation creates opportunity for attractive growth prospects. 

What Are the Risks of GARP Investing?

While the balance between offense and defense may be attractive, GARP stocks aren’t perfect. The strategy can’t fully insulate your portfolio from market volatility or company-specific risk. Technological disruption, government regulatory action or other factors could upend a company’s business model and significantly compromise its potential for future profit growth. Some companies’ valuations may be highly sensitive to changes in interest rates. GARP investing hinges on analysis of individual companies and their fundamental qualities, meaning selectivity will be key in finding opportunities.  

 

Work with your Morgan Stanley Financial Advisor to determine whether your portfolio can benefit from this style of investing and to identify appealing GARP opportunities. For example, Morgan Stanley Wealth Management’s U.S. Model portfolio takes a long-term view and invests in some of the firm’s highest-conviction ideas that fit into the growth-and-value hybrid approach, with a focus on high quality.

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Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following: https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Companies paying dividends can reduce or cut payouts at any time.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more established companies.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

The returns on a portfolio consisting primarily of environmental, social, and governance-aware investments (ESG) may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. The companies identified and investment examples are for illustrative purposes only and should not be deemed a recommendation to purchase, hold or sell any securities or investment products. They are intended to demonstrate the approaches taken by managers who focus on ESG criteria in their investment strategy. There can be no guarantee that a client's account will be managed as described herein.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Any type of continuous or periodic investment plan does not assure a profit and does not protect against loss in declining markets. Since such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his financial ability to continue his purchases through periods of low price levels.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

 Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

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