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Dorfman: Holiday tradition includes picks from land of GARP

GARP investing is not my home turf. But it’s the next town over.

GARP stands for “growth at a reasonable price.” It occupies the middle ground between value investing and growth investing.

My style is value, a cheapskate’s hunt for bargains. The stocks I relish sell for 15 times per-share earnings or less.

Others prefer growth, the search for stocks with rapidly increasing sales and earnings. Growth investors are often willing to pay 20 to 30 times earnings for a promising stock. If a stock looks to them like the next Google, they might even pay 50 times earnings or more.

In the middle lies GARP, and GARP stocks often command a price/earnings ratio of 15 to 20.

Once a year, at Thanksgiving time when people are loosening their belts, I venture a few GARP picks in this column.

A GARP feast

I started this holiday tradition in 1998 and have written 13 GARP columns, not counting this one. Ten of the 13 have beaten the Standard & Poor’s 500 Index, and nine of the 13 have been profitable. The average one-year gain for my GARP selections has been 15.6 percent, versus 8.4 percent for the index.

Last year’s list worked out well, with high returns from Signet Jewelers Ltd. (SIG, up 59 percent), United Therapeutics (UTHR, up 40.2 percent) and Snap-on Inc. (SNA, up 29.6 percent). A big loss in Female Health Co. (FHCO, down 52.7 percent) was a fly in the ointment. Still, the average return was 19 percent, compared with 14.5 percent for the S&P 500.

Bear in mind that my column results are theoretical and don’t reflect trading costs or taxes. They shouldn’t be confused with the performance of accounts I manage for clients. Also, past performance doesn’t guarantee future results.

Apple

My first GARP recommendation this year is Apple Inc. (AAPL), the largest U.S. company by market value, and the maker of the amazing, and amazingly popular, iPhone. I had hoped to buy some Apple at $93 a share in the October market decline, but it never got down to my price.

As noted, I’m a cheapskate. But for people willing to pay up a little for quality, Apple makes a great deal of sense. It has an immense cash hoard, a great brand and a loyal following. The recent statement by Apple CEO Tim Cook that he is gay will neither help nor hurt the company, in my opinion.

Apple shares go for 18 times earnings, which doesn’t seem too much to pay for a company that earned a sparkling 33 percent return on stockholders’ equity last year.

PRA Group

A midsized stock that looks interesting is PRA Group Inc. (PRAA), which buys delinquent consumer debt from retailers, banks that issue Visa and MasterCards, and other merchants. Based in Norfolk, the company increased its revenue to $735 million last year from $459 million two years earlier.

Earnings have come along nicely, as well. Now the economy is strengthening, which should mean fewer consumer defaults. But I think PRA will still get plenty of business from merchants that want to clean up their balance sheets. Lower defaults should help PRA, which is hardly covered by Wall Street.

PRA shares trade for 17 times recent earnings, but only 12 times the earnings analysts project for 2015. It operates in the United States and Great Britain.

Western Digital

For years, I’ve been recommending Western Digital Corp. (WDC) as a value stock, and I’ve owned it for clients for several years. The stock has almost quadrupled since mid-2011, which pushes it from value territory into GARP territory.

It sells for about 16 times earnings. I still own it personally and for clients, even though it is no longer the screaming bargain it was a few years ago.

The company, based in Irvine, Calif., is one of only four major disk drive manufacturers in the world. Their oligopoly gives them pricing power. Yet there is just enough competition to keep antitrust authorities at bay.

Fossil Group

Fossil Group Inc. (FOSL), with headquarters in Richardson, Texas, makes wallets, handbags, belts, and other accessories, and also manufactures clothing. It sells merchandise under its own brands and under licensed brands such as Adidas, Karl Lagerfeld and Michael Kors.

From 2009 through 2013, Fossil’s revenue more than doubled, growing to $3.26 billion from $1.55 billion. Earnings swelled to $378 million from $139 million.

With that sort of growth, the recent multiple of 16 times earnings doesn’t seem like too much to pay.

Whether your style is GARP or not, I think these four stocks deserve serious consideration.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston.


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