Returning to GARP

Over a dozen years ago it was popular for investment managers to use the term GARP (Growth at Reasonable Price) to guide and talk about their portfolio strategy. At that time, investors were burned by running into technology companies selling at high prices and multiples of earnings. Investors were chasing what was popular and ignored what they were paying for the stocks they bought. After the fallout and pain that nearly everyone felt, investment managers turned to a lower risk strategy that was made popular by well known investors such as Peter Lynch and Warren Buffett. These investors taught us that it was important to invest for growth at a reasonable price, not growth at any price.

Today, we are coming into April 2012 with a pretty good advance over the last 6 months for common stocks but some pretty large uncertainties ahead of us. To put simply, those concerns center around how investor returns are going to be taxed beginning in 2013. It is scary to think about but unless Congress decides to grow a spine and some common sense before January 2013, taxes for dividends and interest as well as taxes on capital gains will increase materially.

From an investment perspective, I believe portfolio managers will start to factor in these risk concerns along with the macro-economic concerns such as rising debt and European sovereign credits beginning this quarter. You may have heard this before, but investment managers buy and sell common stocks with a forward outlook about what the economy and investment environment will look like six or nine months in front of us. I admit that over the last three years this viewpoint has been challenged with the surge in volatility. Nevertheless, I will assume that with small changes in the global investment environment, tax policy will be a major concern and talking point by the media over the balance of this year.

So, from the standpoint of investment strategy what does this mean? I believe we need to look for new investment ideas that fit the definition of GARP. This means seeking stocks that combine tenets of both growth and value investing. Further, stocks that are showing consistent earnings growth above broad market levels should be favored over companies that trade at very high valuations. The overarching goal is to avoid the extremes of either growth or value investing that leads us to growth oriented stocks with relatively low price/earnings multiples in normal market conditions.

One of the most important elements of successful investing over the last three years has been investing in high dividend paying stocks. Going forward, I believe this strategy will be tweaked by investors to emphasize stocks with healthy dividend income potential.  Good examples of companies that possess these parameters may include; Eaton, Schlumberger, PepsiCo, Microsoft, American Express, DuPont, Honeywell, IBM, and ExxonMobil*.

In summary, I believe it will be important to gradually shift more emphasis to this GARP type investing strategy over the next six months while maintaining a diversified portfolio of high quality corporate, municipal bonds, REITS, and MLPs for safety.

Have a great week,

Roger N. Steed
April 16, 2012

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