For investors looking to balance the search for high-growth companies with a careful view on price, the "Growth at a Reasonable Price" (GARP) method presents a useful framework. This approach seeks to find businesses that are increasing quickly but are not valued at extreme highs, trying to reduce some of the dangers linked to pure momentum investing. A practical method to use this strategy is through systematic filtering, searching for stocks that show solid growth measures, acceptable basic profitability and financial strength, and a price that does not seem excessive. One stock that recently appeared from such an "Affordable Growth" filter is Super Micro Computer Inc (NASDAQ:SMCI).
A Look at Growth and Value
The center of the GARP strategy depends on locating companies where very good growth possibilities are not yet completely seen in the share price. According to the fundamental analysis report for Super Micro Computer, the company shows this situation plainly. Its total fundamental score is a 6 out of 10, but this number hides a notable difference between its growth potential and its present valuation.
Growth Path:
- Past Results: The company has an excellent history of sales increase, with an average yearly growth rate of 45.76% over recent years. Even on a trailing twelve-month basis, sales increased by a solid 11.94%.
- Future Predictions: Analysts expect this solid trend to keep going, with estimated yearly sales growth of 21.77% and earnings per share (EPS) growth of 12.24% in the next years.
- Score: This strong growth picture is shown in a ChartMill Growth Score of 8 out of 10, putting it clearly in the "good growth" group sought by the filter.
Valuation Setting:
- Comparative Price: In spite of its growth, SMCI's valuation seems fair compared to similar companies. Its Price/Earnings (P/E) ratio of 21.18 is lower than about 66% of companies in the Technology Hardware, Storage & Peripherals industry.
- Future Measures: The valuation view looks better when considering the future. The Price/Forward Earnings ratio of 11.20 is viewed as quite acceptable and is lower than 74% of industry rivals. It also rests well under the current S&P 500 average.
- Score: The ChartMill Valuation Score of 5 shows this varied but generally positive view, it is not very low priced, but it is also not high priced, meeting the filter's requirement of being "not overvalued."
Supporting Basics: Profitability and Financial Strength
While growth and value are the main factors of the GARP filter, the addition of conditions for acceptable profitability and financial strength is important. These elements give a base, indicating the company's growth is lasting and not built on weak financial footing. SMCI's numbers in these areas back its inclusion.
Profitability Picture: The company gets a Profitability Score of 6. Important positives include a steady history of yearly profitability and return measures (Return on Assets, Equity, and Invested Capital) that usually do better than a majority of industry peers. Its profit margin of 3.77% is also in the better half of the sector. However, investors should be aware the company works with a fairly low gross margin (10.08%), which is a point of market competition but is balanced by its efficient size and operational management.
Financial Strength Review: SMCI gets a Financial Strength Score of 6. The balance sheet indicates notable positives in liquidity, with a very solid Current Ratio of 5.39 and Quick Ratio of 2.95, doing better than over 85% of its industry. This shows a strong capacity to meet near-term responsibilities. The company's Altman-Z score also points to a low short-term chance of financial trouble. A point to watch is the company's use of debt, with a Debt/Equity ratio of 0.72, which is average for the industry but shows a medium amount of financial borrowing.
Why This Mix is Important
The filter reasoning that found SMCI is made to locate companies like it: those with the driver of solid growth, but with the protective elements of fair valuation, established profitability, and a sound financial setup. The growth makes possible gain in share price, while the fair valuation gives some protection against market declines or growth slowdowns. The acceptable profitability and strength scores suggest the company is handling its growth well instead of spending heavily to expand, which is necessary for long-term survival.
Finding Other Possibilities
Super Micro Computer Inc offers an example in how the Affordable Growth filter settings can reveal interesting GARP possibilities. For investors wanting to examine other stocks that currently fit these conditions of solid growth, fair valuation, and acceptable basics, you can view the current results of the filter here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer or request to buy or sell any securities. The information given is based on supplied data and should not be the only foundation for any investment choice. Investors should do their own separate study and talk with a qualified financial advisor before making any investment decisions. Past results are not a guide for future outcomes.
