Growth at a reasonable price (GARP) is an investment strategy that seeks to combine the best of both growth and value investing. The core idea is to identify companies that are expanding their earnings and revenues at an above-average rate but are not yet trading at the excessive valuations often associated with high-growth stocks. By focusing on solid fundamentals, a strong financial health profile, and a valuation that hasn't yet fully priced in future potential, GARP investors aim to capture long-term appreciation with a margin of safety. The "Affordable Growth" screen used to select the following stock is a practical application of this philosophy, looking specifically for companies with a ChartMill Growth rating above 7 and a Valuation rating above 5, while also ensuring decent profitability and health scores.
DexCom, Inc. (NASDAQ:DXCM) presents an interesting case study for the GARP approach. The company, a leader in continuous glucose monitoring (CGM) systems, has carved out a significant niche in the diabetes management market. Its products, from the G6 and G7 to the newer Stelo over-the-counter biosensor, place it at the forefront of a quickly growing addressable market. This isn't just a story of a single product; it's about a platform that helps patients and clinicians with real-time data, driving better health outcomes and creating stable, recurring revenue streams.
Growth: The Engine of the Thesis
The "Growth" component of the GARP equation is where DexCom stands out. According to the fundamental analysis report, the company earns a strong ChartMill Growth rating of 7 out of 10. This rating is backed by concrete figures that investors should find interesting:
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Excellent Past Performance: Earnings Per Share (EPS) grew by a strong 27.27% over the past year, with an average annual growth rate of 19.29% over the previous years. Revenue has followed suit, growing by 15.60% in the last year and 19.33% on average over the past several years. This consistency points to a business model that is scaling effectively.
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Strong Future Prospects: The growth story is not just historical. Analysts expect EPS to grow by an average of 22.44% per year in the coming years, with revenue projected to grow at 12.44% annually. This sustained growth trajectory is the foundation of the GARP strategy—it implies that the company is not a one-hit wonder but is building for the long term.
Valuation: The "Reasonable Price" Check
A high-growth stock is only an "Affordable Growth" candidate if its valuation hasn't become detached from reality. This is the filter that prevents investors from overpaying for future promises. DexCom’s ChartMill Valuation rating of 6 out of 10 suggests the stock is not prohibitively expensive, especially when considered against its growth prospects.
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Compensated for Growth: The valuation report highlights that the low PEG Ratio (NY), which divides the Price/Earnings ratio by the earnings growth rate, indicates a rather cheap valuation for the company. This is the classic GARP metric—it shows that the high P/E is being justified by an even higher expected growth rate.
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Industry and Multiples Context: While the absolute P/E ratio of 28.36 might seem high, it is cheaper than 71.12% of its peers in the Health Care Equipment & Supplies industry. Similarly, its Enterprise Value to EBITDA and Price/Free Cash Flow ratios are more attractive than a significant majority of the competition. This relative cheapness within its own sector is a strong sign for value-conscious growth investors.
Financial Health and Profitability: The Foundation
For a GARP strategy to work, the company must be built on a solid foundation. High growth financed by excessive debt can be risky, and poor profitability undermines the long-term value story. DexCom scores a strong 8 out of 10 in both the Health and Profitability ratings, providing the necessary stability.
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Rock-Solid Profitability: DexCom belongs to the top tier of its industry. With a Return on Equity (ROE) of 30.46%, it outperforms 96.79% of its peers. Its Return on Invested Capital (ROIC) of 18.92% is also impressive, outperforming a similar percentage of the industry. These metrics prove the company is highly efficient at generating profits from its capital base—a key sign of a quality business.
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Excellent Financial Health: The company carries a manageable level of debt, with a Debt to FCF ratio of just 1.20, meaning it could theoretically pay off all its debt in just over a year using its free cash flow. An Altman-Z score of 5.98 indicates no bankruptcy risk, and the company has been reducing its share count, it's also creating value for shareholders. This financial discipline ensures that the growth is sustainable and not fueled by unsustainable leverage.
Analyst Views and Current Context
With the broader S&P 500 showing positive trends in both the long and short term, a quality stock like DexCom in a defensive yet growing healthcare sector becomes an attractive portfolio candidate. Analysts are generally bullish, banking on the continued adoption of CGM technology beyond traditional Type 1 diabetes patients into the much larger Type 2 and pre-diabetic markets. The recent launch of Stelo, an over-the-counter biosensor for those not on insulin, is a direct catalyst for this expansion.
Seeking more opportunities like this?
If the idea of investing in well-run, growing companies at fair prices appeals to you, this is just the starting point. Click through to review the results of the complete Affordable Growth Screen, which filters for stocks that combine strong growth with reasonable valuations and excellent financial health.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. The analysis is based on provided fundamental data and screen selections. Investing in stocks involves risk, including the potential loss of principal. Readers should conduct their own due diligence or consult with a financial advisor before making any investment decisions.