Philosophy

The GARP Philosophy

We believe owning high quality growth stocks bought at reasonable prices can transfer the high return on capital enjoyed by such companies into appreciation over time. Our philosophy combines three concepts: growth, quality, and the control of risk. Our viewpoint has not changed over time, save for our ability to increase the upper boundary of market capitalization twice, from $3 billion to $5 billion and then to $10 billion.

Growth

We are aggressive in our growth expectations, seeking an increase in earnings that ranges from 50% to 100% or more over three years. Once the market recognizes that growth is indeed persistent, improved valuation can act as a second lever of appreciation, for we initiate buy recommendations at reasonable prices.

Quality

Just as with real estate, potential buyers have a different perspective than renters. For this reason, quality is paramount in long-term holdings. This we judge by assessing return on capital, both absolutely and if it can remain above that of a firm's rivals all the while market share can be gained in a secular trend. GARP believes that firms with a modest base of assets that generate gross margins in excess of 50% are most capable of extraordinary profitability. Habitually we recommend stocks whose revenues are a large multiple of the funds they have invested in bricks & mortar facilities. Sometimes these firms have negligible accounts receivable or inventories, which also keeps capital employed to a minimum.

Control of Risk

A multi-year perspective requires extensive research to establish that an investment can sustain growth and a quality advantage for years. We must be confident we have done our research thoroughly and are well positioned to respond to the twists and turns that inevitably occur. GARP controls risk by avoiding stocks whose valuations are unreasonable, based upon a quantitative review of earnings potential by the end-point of our initial investment horizon. A critical method of finding value is our "modified" contrarian approach to technical analysis. We avoid stocks that have risen sharply, and regularly search for new ideas among equities that have fallen 50% in price. By "modified" we mean that we prefer to initiate coverage well after disaster has struck and the market has had months or in many cases years to digest negative fundamental developments.