Alphabet Inc-CL C (NASDAQ:GOOG) represents an interesting opportunity for investors who follow the Growth at a Reasonable Price (GARP) approach. GARP combines elements of both growth and value investing, seeking companies with strong earnings expansion but without overpaying for that growth. Alphabet, the parent company of Google, fits this strategy due to its consistent profitability, solid financial health, and reasonable valuation relative to its growth prospects.
Why Alphabet Fits the GARP Strategy
Alphabet meets several key criteria that align with Peter Lynch’s investment philosophy, which emphasizes sustainable growth, reasonable valuations, and strong financial health. Here’s how GOOG stacks up:
Earnings Growth: Over the past five years, Alphabet has delivered an impressive EPS growth of 25.25%, comfortably within Lynch’s preferred range of 15% to 30%. This indicates strong, but not excessive, expansion.
PEG Ratio: The PEG (5Y) ratio of 1.40 suggests that while the stock isn’t deeply undervalued, it remains reasonably priced relative to its historical earnings growth.
Strong Profitability: With a Return on Equity (ROE) of 32.15%, Alphabet significantly outperforms most peers in the Interactive Media & Services industry.
Low Debt: The company maintains a conservative Debt/Equity ratio of 0.04, well below Lynch’s preferred threshold of 0.6.
Liquidity: A Current Ratio of 1.77 ensures Alphabet can comfortably meet short-term obligations.
Profitability (9/10): High margins, strong ROE, and consistent cash flow generation.
Financial Health (8/10): Minimal debt, solid liquidity, and a strong Altman-Z score (11.65).
Valuation (5/10): While not cheap, the stock trades at a discount to the S&P 500 and industry averages.
Growth (7/10): Revenue and earnings continue to expand, though future growth may moderate slightly.
For investors seeking a diversified portfolio of GARP stocks, our Peter Lynch-inspired screener provides additional candidates with similar characteristics.