When buying stocks, many investors follow a strategy of targeting growth at a reasonable price (GARP) — including me.
It means I’m often rarely involved in the fastest-growing businesses when their valuations are astronomically high. But maybe that’s a good thing because popular and expensive stocks can handbrake turn on a penny if investor sentiment turns against them. In many ways, such beasts can be risky investments.
Businesses turning around
But one of the advantages of GARP investing is it can catch businesses on the turn — when they might be emerging from a troubled operational period into a new phase of growth. And sometimes, GARP stocks can go on to become popular and pricey growth stocks when the ‘story’ becomes well known in the investment community. However, that doesn’t always happen, of course.
I think GARP investing best describes the strategy that famous and successful investor Warren Buffett has been following for decades. And I also believe it’s what many investors in America mean when they speak of value investing. Buffett’s early investing style of looking for deep value situations went out of the window decades ago. And the father of value investing — Benjamin Graham — declared the strategy dead way back in the 1970s when the opportunity pipeline dried up.
After all, deep-value investing relies on mispricing by the stock market. And for many years, higher market participation and better information transfer have ironed out many mispriced situations before they can dig in.
Meanwhile, one stock I consider to be a GARP situation today is pharmaceutical company Indivior (LSE: INDV). The stock suffered some heavy blows from generic competition and legal challenges that sunk its earnings in 2019. But lately, it’s been rebuilding profits in its field of treating addiction and serious mental illnesses.
An upbeat outlook
In late October 2021 with the third-quarter results report, chief executive Mark Crossley was upbeat. The company reported “another quarter of good growth and further strengthening of our leadership in addiction treatment.” And the success arose because of the “strong” commercial execution behind the company’s injection product Sublocade. And there was also “resilience” from the legacy film business in the US.
Looking ahead, Crossley said the firm’s ongoing strategy involves focusing on the “large and growing”opportunity in organised health systems (OHS). He reckons the approach has already delivered five consecutive quarters of double-digit growth in underlying net revenue from Sublocade. And the business has “strong momentum” for 2022.
Meanwhile, with the share price near 240p, the forward-looking earnings multiple for 2022 is just above 15. And that’s when set against City analysts’ expectations for a more than 40% uplift in earnings this year. I think the valuation looks fair. And if I adjust for the cash pile sitting on the balance sheet, the rating can be lowered by around 30%.
There is some risk here because of the company’s narrow product focus. And we’ve seen recently what can happen when such risks bite. But I bought the stock recently to hold for the long term.
I’m also considering this one.
Is this little-known company the next ‘Monster’ IPO?
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
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Kevin Godbold owns shares in Indivior. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
