Growth at a Reasonable Price: GARP Investing a Forgotten Asset Class?

As documented extensively in our research, many “growth stocks” have soared due to a misplaced focus on the growth rate of revenues without any focus on earnings creating an opportunity in growth at a reasonable price
The myopic focus on sales growth left an entire asset class of stocks with high earnings growth at reasonable valuations behind, and these stocks look uncommonly appealing today, in our view
After two years of struggling, recent results from our GARP stock screener and its associated model portfolio have been stunning, and we believe growth at a reasonable price may continue to offer terrific risk and return trade-offs, particularly when compared to rank speculative investments
Recent outsized GARP results should persist when compared to core indexes, in our view
Our GARP investment strategy reconciles the debate around the merits of growth and value investing by offering investors the best of both worlds in one concentrated portfolio of stocks that offer growth at a reasonable price

The chart below shows the rolling 12-month excess returns of our GARP Model vs. its benchmark. As one of the first products built by the team, it has been in live production since 2011. We explained the methodology that underpins the model in our piece The Siren Song of Growth – Why Investors Willfully Set Sail for the Rocks.

In that piece, we explained how to improve security selection among stocks with earnings growth rates well above the market. The model portfolios built by the associated ranking tool are highly concentrated in a small number of stocks offering growth at a reasonable price.

Since its inception, the product has put up significant excess returns. For almost seven straight years, the model offered GARP investors a reliable source of alpha. That came to a screeching halt when the growth bubble took off in 2017. From April of 2017 – February of 2020, the model, like all GARP investors, took a ruthless beating as people crowded into high-priced, low-quality companies that often featured abysmal fundamentals

You can see that recent results have been stunning. The rest of this paper explains why we believe this is only the beginning of what will be a long run for fundamentally sound growth stocks at the expense of stocks with fast growth in sales but lacking profits. We believe the recent rally is a new dawn for discplined GARP investors.

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Asset Allocation: “Did I Miss the Rotation to High Quality?”

KCR gets this question a lot. Speculative glamour stocks have taken a fearsome beating. Many investors with gray hairs are scarred by the post-2017 period. Characterized by negative nominal and real rates, accelerating monetary debauchery by central banks, and furious trading of speculative shares, it is easy to think that the most minor shift towards a semblance of normalcy is “the end.”

The KCR team will write about this in more detail shortly, but Fig. 2 below should help

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SERVICES

As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Click the following to read more about What is Asset Allocation, Vanguard Small Cap, Market Neutral Funds, Carvana Market Cap, Small Caps Vs Large Caps

SOURCES

^[1] Hat tip to Paul G – thank you!!

^[2] NOTE: that was a brutal ride as the stock rose 80% post publication…. but we would note that as we have attested since our founding in 2010, economic gravity ALWAYS returns and Carvana is now down -30% absolute since publication and lagging the Russell 1000 and Russell 2500 Growth Indexes by nearly 65%.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.