Short for growth at a reasonable price, GARP investing involves finding stocks with strong growth potential, low debt and a decent price tag. It wasn t a particularly successful strategy during last year s market run-up, because so many ultra-cheap stocks that had debt-laden balance sheets took off. But some market professionals say GARP investing holds particular appeal today, in a market with fewer obvious deals, since it focuses on less spectacular opportunities.

The holy grail is to find cheap stocks that will grow faster than you think or faster than the market, says Jerry Jordan, manager of the $96.6 million Jordan Opportunity fund and a GARP follower. When they go from cheap to expensive, you make a fortune.

The market s 67 percent upswing since March 2009 was fueled by relief that the economy didn t continue falling and, more recently, by the steady drumbeat of strong corporate earnings. The challenge for companies now is to execute business models and grow sales, says Alan Gayle, senior investment strategists at RidgeWorth Capital Management. In this back-to-basics environment, a GARP approach makes a lot of sense, Gayle says.

Brian Kazanchy, chair of the investment committee at financial-planning firm RegentAtlantic Capital in Morristown, N.J., says he reevaluated his clients GARP fund holdings in light of their recent underperformance but found no reason to abandon the strategy. In this type of market, having high-quality companies selling at reasonable prices is a good way to go, he says.

Of course, if you think the market is gearing up for another big rally, GARP might not be for you. As a rule, the stocks are solid but not particularly glamorous, such as Microsoft and Philip Morris International. But the tobacco maker, for example, is an extremely high cash-flow business that s trading at about 12 times next year s earnings, below the average for the market overall, says Chris Armbruster, vice president for research at Al Frank Asset Management. And sales at the company are expected to increase 8 percent this year when, as Armbruster put it, growth for a lot of companies is hard to come by.

As straightforward as the principle of growth at a reasonable price is in theory, it can be a little more complex in practice. All GARP investors pay close attention to a stock s valuation and its ability to sustain growth. But there s a gray middle ground.

Some GARP fund managers hold Google, for example, thinking the search giant s price-to-expected-earnings ratio of 18 isn t too expensive because the company has a strong potential for profit growth. Others would never put Google and GARP in the same sentence (unless they were searching for the John Irving novel or the 1982 film). Still, for many investors in today s market, a deal-seeking strategy by any name has an appeal.

Our Picks

Analysts say these firms are worth a look because they have solid growth prospects at a time of dwindling bargains.

Philip Morris International
Ticker:
Market Value: $85.6 billion
P/E: 12
This New York based company trades at a premium to its tobacco-making peers. But its valuation is very fair for the growth potential, says Chris Armbruster, vice president for research at Al Frank Asset Management. The firm is expected to increase earnings by about 11 percent this year.

Walt Disney
Ticker:
Market Value: $67.0 billion
P/E: 17
Some analysts say the growth in mobile devices will help spark profits for the companies that produce TV shows and other content for them. That s good news for Disney, operator of the ABC and ESPN television networks. Disney s stock sells for less than it did in 1998, yet its earnings are much more robust now, says Jerry Jordan, manager of the Jordan Opportunity fund.

Coca-Cola
Ticker:
Market Value: $123.2 billion
P/E: 16
Like Philip Morris, Coke is a big beneficiary of the expanding global economy. The pros also like the Atlanta-based beverage company for its ability to successfully pass along price increases. Its P/E is well below its 10-year average of 24.

Microsoft
Ticker:
Market Value: $253.6 billion
P/E: 14
Microsoft has been a popular stock to hate, says Alexander Motola, manager of the Thornburg Core Growth fund. The Redmond, Wash. based company has tripled its cash flow and earnings in the past 10 years and doubled its revenue base, but the stock price remains well below its highs.

Source: Bloomberg