GARP: the investing strategy between growth and value

Most investors, at some point, find themselves stuck between two uncomfortable positions. Buying cheap shares looks sensible until the company turns out to be cheap for a reason. Buying fast-growing companies feels exciting until the price collapses the moment growth slows for a single quarter. GARP, which stands for Growth at a Reasonable Price, is the strategy that tries to solve that dilemma. It has a long track record and some notable names attached to it, and understanding it changes how you look at almost every share you consider buying.

The investing world tends to divide into two camps. Value investors, in the tradition of Benjamin Graham and Warren Buffett, look for companies trading below what they believe the business is actually worth. They hunt for bargains: shares that look too cheap relative to earnings, assets, or cash flow. Growth investors take the opposite approach. They focus on companies expanding revenues and profits quickly, reasoning that the share price will follow earnings upward over time. Both approaches have produced strong long-term results. Both have also produced spectacular disasters when investors taken them to an extreme.

GARP sits between those two camps and insists that both price and growth matter simultaneously. It was popularised by Peter Lynch, the fund manager who ran Fidelity’s Magellan Fund from 1977 to 1990 and achieved annualised returns of around 29 per cent over that period. Lynch’s central insight was that paying too much for growth is just as dangerous as buying a company that is cheap because it is in decline. The strategy demands that you find companies that are growing and that you do not overpay for that growth.

The tool GARP investors use most often is the PEG ratio, which stands for price-to-earnings growth. You take a company’s P/E ratio, which is the share price divided by earnings per share, and divide it by the expected annual earnings growth rate. A P/E of 20 and expected earnings growth of 20 per cent per year gives a PEG of 1.0. Lynch argued that a PEG around 1.0 was roughly fair value for a growth stock. A PEG below 1.0 suggests the shares might be undervalued relative to growth. A PEG well above 1.0 suggests investors are paying a significant premium for growth that may or may not materialise.

To make that concrete, imagine two UK companies. Company A is a retailer with a P/E of 12 and earnings expected to grow at 4 per cent per year. That gives a PEG of 3.0. The shares look cheap by one measure, but the growth is modest and investors are paying three times what Lynch would consider fair for that rate of progress. Company B is a technology business with a P/E of 25 and earnings expected to grow at 30 per cent per year. Its PEG is 0.83. On GARP thinking, Company B is the more attractive option, even though its P/E ratio looks far more expensive at first glance.

This is why GARP investors often end up holding businesses that look optically expensive to pure value investors. A FTSE 250 healthcare company with a P/E of 22 might seem pricey compared to a struggling retailer on a P/E of 8. But if the healthcare company is compounding earnings at 25 per cent per year and the retailer is barely treading water, the real cost of each investment looks very different once you apply the PEG lens. GARP also places emphasis on quality alongside growth. Lynch and others in this tradition look for companies with durable competitive advantages, strong management, and businesses that are relatively easy to understand. A fast-growing company with a reasonable PEG still fails the GARP test if its business model depends on burning cash indefinitely or if the growth is driven by one-off factors that cannot be repeated.

The most common misunderstanding about GARP is that it is simply a halfway house, a compromise for investors who cannot decide whether they are value or growth investors. That misses the point. GARP is not about meeting in the middle and ending up with a mediocre version of both strategies. It is a disciplined framework that combines the value investor’s insistence on not overpaying with the growth investor’s focus on earnings momentum. The discipline is genuine. A GARP investor will walk away from a compelling growth story if the price has already run far ahead of anything the PEG can justify.

The second misconception is that reasonable price means cheap. It does not. GARP accepts that good growth companies will never look cheap by traditional value measures. A P/E of 18 might be entirely reasonable for a business growing earnings at 20 per cent per year. What GARP rules out is paying a P/E of 50 for the same company because everyone is excited about it. The strategy requires you to make a genuine assessment of sustainable earnings growth, rather than simply paying whatever the market currently demands.

If you want to apply GARP thinking to your own investing, start with the PEG ratio as an initial filter rather than a definitive answer. For UK shares, you can find P/E ratios on any standard broker platform, and consensus earnings growth forecasts are available on sites like Hargreaves Lansdown, Stockopedia, and the London Stock Exchange investor pages. A PEG below 1.0 is worth examining further. A PEG above 2.0 is a signal to ask whether the growth justifies the valuation, and to be honest about the answer.

Beyond the PEG, look at the quality of the earnings. Is growth being driven by genuine demand for the product or service, or by acquisitions and accounting adjustments? Is the company generating real cash, or does profit on paper diverge from cash in the bank? Lynch was unimpressed by growth achieved through debt-fuelled expansion. A company that grows by borrowing heavily is not the same as one that grows because customers keep coming back and the business generates more cash each year than it needs to spend.

GARP is not a formula that produces buy decisions automatically. It is a way of thinking that stops you from making two very common mistakes simultaneously: buying something cheap that deserves to be cheap, and buying something exciting at a price that already assumes everything goes perfectly. Getting that balance right is what long-term investing is mostly about.

TL;DR – the short version

• GARP stands for Growth at a Reasonable Price, a strategy that combines value discipline with a focus on earnings growth.
• The key tool is the PEG ratio: take the P/E ratio and divide it by the expected annual earnings growth rate.
• Peter Lynch, who popularised GARP, suggested a PEG around 1.0 is fair value; below 1.0 may indicate an undervalued growth stock.
• A company with a high P/E can still be good value if its earnings are growing fast enough to justify the price.
• GARP is not a compromise between value and growth; it is a disciplined framework that uses both lenses together.
• The PEG ratio is a starting point, not the whole answer; quality of earnings and the durability of growth matter just as much.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.

Nothing in this article is financial advice. Tax rules change frequently. Check the current ISA allowance, CGT exemption and relevant rules on HMRC’s website or consult a qualified financial adviser for your specific situation.