2 of the most popular schools of investing are value investing and growth investing. Each school has its merits and drawbacks. And, each approach has generated life-changing wealth for successful adherents.
The major risk for value investors is that they are buying stocks that are cheap because the market is expecting a deterioration in the business’ earnings power often due to outside forces. A major example is Intel (INTC) which has posted impressive financials, yet its stock has underperformed as its chip technology fell behind competitors which indicates future weakness in revenue growth and pricing power.
And, we are living through a major risk for growth investors. Valuations can get so extreme that stocks can sustain heavy losses due to a slowdown in growth or change in economic or monetary conditions.
However, these challenging market environments can create opportunities to buy fantastic companies at bargain prices. Therefore, those who are looking to take advantage of this dislocation should consider growth at a reasonable price (GARP) stocks.
GARP is a strategy that blends growth and value investing and eliminates the worst aspect of each. The GARP approach can reduce the downside risks of growth investing by filtering out overvalued companies. Overvalued stocks are the most vulnerable to steep losses when market conditions turn sour or the company has a bad earnings report.
Here are 3 top GARP stocks that investors should consider.
Cigna Corp. (CI)
CI is a multinational managed healthcare and insurance company with various subsidiaries that offer medical, dental, disability, life, and accident insurance. It also offers Medicare and Medicaid plans and products. The majority of its plans are offered through employers and large organizations. It operates through three segments—Evernorth, U.S. Medical and International Markets.
The rising cost of healthcare means that health insurers have also prospered. These stocks tend to outperform during periods of rising employment as this means more people will be enrolled in Cigna’s insurance plans. Thus, the company weakened as jobs were shed during the coronavirus crisis last year. However, it staged an impressive rebound as the economy has started to recover.
This is evident from its last earnings report which showed a 9% increase in revenue from last year to $41.7 billion, topping expectations. Net income increased 323% to $4.1 billion. As a result, analysts hiked their outlook for its full-year results. Currently, they are projecting EPS of $20.26 and revenue of $169 billion with both figures representing a 9% increase from 2020.
CI’s earnings reflect its above-average growth prospects. However, it has a price to earnings ratio of 11 which means it’s significantly cheaper than the S&P 500’s price to earnings ratio of 44.
The stock has an overall A rating, which equates to a Strong Buy in the POWR Ratings. A-rated stocks have posted an average annual performance of 30.7%. In terms of its components, CI has a B for Value. Even if looking at its forward price to earnings ratio of 11.4, it remains cheaper than the S&P 500 by more than 50%.
To see CI’s other component grades including Growth, Stability, Sentiment, Momentum, Quality, and Industry, please click here.
MU is a leading maker of DRAM and NAND memory chips. Memory chips are integral for all sorts of consumer tech like smartphones, PCs, cameras, and consoles. However, enterprise demand is exploding as they are also increasingly used in cars and data centers. Additionally, there is strong demand from futuristic tech like AI and autonomous driving which bodes well for the company’s growth prospects.
This dynamic is represented in Micron’s recent earnings report which showed a slowing in consumer tech but continued growth in enterprise spending. Over the next year, it’s forecasting DRAM demand to grow in the teens and NAND demand to grow by 30%.
Last quarter, MU’s data center business saw 60% revenue growth. MU’s automotive segment also offers growth upside, and it currently has 50% of the automotive memory market. Cars are increasingly becoming electronic, and many of these require memory.
In terms of value, MU also shines with a forward P/E of 5.9. The company also has above-average 29% profit margins which should persist given the company’s falling per-unit costs with increased production and strong demand, leading to pricing power.
MU has a B rating according to the POWR Ratings which translates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual gain of 8.0%. MU is ranked #12 in the B-rated Semiconductor & Wireless Chip group out of #12. Click here to see the other top stocks in the sector and here to see MU’s complete POWR Ratings.
FCX is the world’s largest producer of copper with operations in North America, South America, Africa, and Asia. Overall, copper accounts for 75% of its total revenue. Therefore, it’s not surprising that the stock enjoyed spectacular gains as copper prices rose 65% over the last 2 years.
However, copper prices are down by nearly 30% due to the lockdowns in China and concerns that the global economy may be slowing, resulting in a 35% pullback for FCX between mid-April and mid-May. However, FCX remains quite profitable at these prices and attractive from a valuation basis.
The company has a P/E of 9.4 which is significantly cheaper than the market average despite having better growth and cash flow figures. It’s also returning cash to shareholders via its share buyback which equates to 10% of market cap. And, the company has strong, long-term growth prospects due to increasing electrification, EV adoption, and infrastructure spending.
Therefore, investors should look to buy the dip in FCX especially if the drop is due to the Fed’s focus on bringing down inflation. The POWR Ratings are also bullish on FCX as it’s rated a B which translates to a Buy.
In terms of component grades, FCX has a B for Quality due to being one of the largest and lowest-cost producers of copper. It also has a B for Growth due to its very low debt levels and strong cash flow. Click here to see FCX’s complete POWR Ratings.
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CI shares were trading at $243.51 per share on Friday afternoon, down $4.79 (-1.93%). Year-to-date, CI has gained 7.01%, versus a -22.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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