These cheap growth-at-a-reasonable-price (GARP) stocks have huge upside potential with attractive yields
When considering stocks to highlight today, I wanted to find
five growth stocks that not only pay attractive dividends but also have
above-average upside prospects. But to be interesting for this list, these
growth stocks also have to be reasonably cheap using fundamental metrics. The
idea is that you get the best of both worlds — a cheap purchase points and high
expected returns.
For example, the stocks I’ve honed in on here have expected
earnings and/or free cash flow for the next year but still sell for less than
sixteen to seventeen times earnings. In addition, the dividend yields are
higher than average at 3% to 5%.
So, in a sense, you get both a growth stock and a relatively
cheap stock. In fact, there is a term
for this: GARP stocks (Growth At a Reasonable Price). You can Google the term
“GARP stocks” and see what I mean.
GARP Stocks, Their Price Targets and Upside Potential
GARP stocks are in a sort of mid-point between the growth
and value stock investment philosophies. They are cheap but their earnings are
growing fast. They also pay attractive dividend yields.
The growth stocks also have good upside prospects. I
measured the value of each stock using three different methods and then average
them. The first is the price target based on its average dividend yield.
A second target price was derived by using the historical
price-to-earnings ratio and applying it to forward earnings per share.
The last method uses comparable ratios of peers and applies
those measures to derive the comp-based target price. I then averaged all three
methods. The upside potential of all of these growth stocks is between 12% and
62%. As a group, they average about 38% upside potential.
The five cheap growth stocks I finally settled on are:
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