Stock valuations according to GARP
It’s a "{{nofollow}}stock picker’s market," Barron’s suggested earlier this year. This investing cliché suggests that selecting growth stocks with appealing valuations will be paramount in an environment where broader indexes are stagnant. ({{nofollow}}Indeed, the S&P 500 finished October down 2 percent amid earnings-related selloffs in some high-profile names.)
The strategy in our scatterplot visualisation is “growth at a reasonable price,” or GARP. Using FactSet data, we created buckets of large-capitalisation US stocks by sector, searching for relative undervaluation. Our “earnings growth” x axis compares estimates for the next 12 months to the 12 months after that; our “historic price-earnings valuation” y axis compares the forward P-E ratio’s deviation from the 10-year average.
This analysis found that telecommunications stocks have the greatest GARP potential: they’re well below their historic price-earnings ratios and analysts are estimating dramatic earnings growth over the next two years. Consumer services, utilities and energy also perform well in this analysis. The reverse was true for consumer cyclical and business-services stocks.