Growth at a reasonable price (GARP) is an investment strategy that blends growth and value investing methodologies. Given the uncertainties surrounding the pace of economic recovery because of the resurgence of COVID-19 cases, the stock market is expected to be turbulent. So, we think investors looking to dodge short-term market fluctuations could consider these GARP stocks: Rio Tinto (RIO), HCA Healthcare (HCA), and Southern Copper (SCCO). Read ahead to learn more.
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The growth at a reasonable price (GARP) strategy aims to deliver ideal investment bets by combining the best features of value and growth investing methodologies. GARP investors seek to gain from stocks that are valued below the market, or any reasonable target determined by fundamental analysis. These stocks also have promising growth expectations in terms of cash flow, revenue, EPS, and other metrics.
Following a smooth ride so far this year, the stock market now seems somewhat vulnerable due to weak economic recovery forecasts and the Fed’s policy meeting next week. Many analysts predict a “bumpy September-October” for the market. As such, GARP stocks could be ideal for investors that are looking to dodge short-term market fluctuations and gain from long-term trends.
Given this backdrop, we think Rio Tinto Group (RIO), HCA Healthcare Inc. (HCA), Southern Copper Corporation (SCCO), and ArcelorMittal (MT), which possess GARP features, could be great additions to one’s portfolio now.
Rio Tinto Group (RIO)
London-based RIO is a global mineral resource exploration, mining, and processing company. The company’s product portfolio includes aluminum, copper, diamonds, gold, borates, titanium dioxide, salt, iron ore, and uranium. In addition, it owns and operates open pit and underground mines, mills, refineries, smelters, power stations, and research and service facilities.
This month, RIO and Caterpillar Inc. (CAT) signed a memorandum of understanding for Caterpillar to develop zero-emission autonomous haul trucks for use at one of Rio Tinto’s mining sites in Western Australia. The collaboration will help advance the development of the manufacturer’s future 220-tonne 793 zero-emissions autonomous haul truck, including validating Caterpillar’s emerging zero-emissions technology.
During the six months ended June 30, 2021, RIO’s sales revenue increased 70.9% year-over-year to $33.08 billion. Its operating profit increased 198.1% year-over-year to $17.44 billion, while its net income grew 271.3% from the prior-year quarter to $12.31 billion. Furthermore, the company’s net cash from operating activities increased 142.7% year-over-year to $13.66 billion over this period. Its revenue has increased at a 12.5% CAGR over the past five years, and its levered free cash flow increased at a 40.8% CAGR over the past three years.
The company’s EPS is expected to grow 113.6% year-over-year to $16.44 in the current year. In addition, analysts expect RIO’s revenue to increase 49.6% year-over-year to $66.76 billion in its fiscal year 2021. RIO’s stock has gained 13.8% in price over the past year.
In terms of forward P/E, RIO is currently trading at 4.24x, which is 71.5% lower than the 14.89x industry average. Also, in terms of its forward EV/EBITDA, the stock is currently trading at 2.9x, which is 61.5% lower than the 7.54x industry average.
RIO’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
RIO is also rated a B grade for Stability, Value, and Quality. Within the Industrial – Metals industry, it is ranked #7 of 38 stocks.
To see additional POWR Ratings for Momentum, Sentiment, and Growth for RIO, click here.
HCA Healthcare Inc. (HCA)
HCA operates as a health care services company in the United States. As of December 31, 2020, it operated 185 hospitals, including 178 general acute care hospitals, five mental hospitals, and two rehabilitation hospitals, 121 freestanding surgical centers, and 21 freestanding endoscopy facilities in 20 states and England. HCA is based in Nashville, Tenn.
During the second quarter, ended June 30, 2021, HCA’s revenue increased 30.4% year-over-year to $14.44 billion. Its net income surged 34.3% year-over-year to $1.45 billion over this period. The company’s EPS increased 38% from its year-ago value to $4.36. Its revenue and EBITDA have grown at CAGRs of 7.41% and 12.8%, respectively, over the past three years.
A $16.76 consensus EPS estimate for the current year indicates a 44.4% improvement year-over-year. Analysts expect HCA’s revenue to increase 11.5% year-over-year to $57.47 billion in its fiscal year 2021. The stock has gained 87.6% in price over the past year and 58.3% over the past nine months.
In terms of forward EV/Sales, HCA’s 2.04x is 70.9% lower than the 7x industry average. In addition, its 15.22x forward P/E is 53.5% lower than the 32.74x industry average.
HCA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has an A grade for Growth and Sentiment, and a B for Quality and Stability. In the A-rated Medical-Hospitals industry, it is ranked #1 of 11 stocks.
In total, we rate HCA on eight different levels. Beyond what we’ve stated above, we have also given HCA grades for Momentum and Value. Get all the HCA ratings here.
Southern Copper Corporation (SCCO)
SCCO mines, explores for, smelts, and refines copper and other minerals in Peru, Mexico, Argentina, Ecuador, and Chile. The company has interests in 59,252 hectares of exploration concessions in Peru; 503,104 hectares in Mexico; 229,312 hectares in Argentina; 27,353 hectares in Chile; and 7,299 hectares in Ecuador. SSC is based in Phoenix, Ariz.
For the second quarter, ended June 30, 2021, SCCO’s net sales increased 62.3% year-over-year to $2.90 billion. The company’s operating income increased 190.2% year-over-year to $1.68 billion. Its net income increased 259.4% year-over-year to $932.7 million, while its EPS grew 255.9% from the prior-year quarter to $1.21. Its net income and revenue have increased at CAGRs of 41.07% and 11.1%, respectively, over the past three years.
Analysts expect SCCO’s revenue to increase 37.6% year-over-year to $10.98 billion in its fiscal year 2021. In addition, the company’s EPS is expected to grow 118.7% in the current year. Over the past year, the stock has gained 28.4% in price.
In terms of forward P/E, SCCO is currently trading at 13.84x, which is 7% lower than the 14.88x industry average. Also, in terms of its forward EV/EBIT, the stock is currently trading at 8.46x, which is 27.9% lower than the 11.72x industry average.
SCCO’s POWR Ratings reflect this promising outlook. SCCO also has a B grade for Quality and Stability. Within the Industrial-Metals industry, it is ranked #10 of 38 stocks.
Click here to see additional POWR Ratings for Growth, Momentum, Value, and Sentiment for SCCO.
MT owns and operates steel manufacturing and mining facilities in Europe, North and South America, Asia, and Africa. Through a centralized marketing organization, the Luxembourg-based company offers its products to various customers in the automotive, appliance, engineering, construction, energy, and machinery industries.
This month, the Republic of Liberia and MT signed an amendment to its Mineral Development Agreement, paving the way for the company’s mining and logistical operations in Liberia to expand. With the MDA amendment, MT Liberia should increase significantly the output of premium iron ore, creating significant new jobs and broader economic benefits for Liberia.
MT’s sales increased 37.6% year-over-year to $35.54 billion in the six months ended June 30, 2021. Its operating income came in at $7.07 billion, versus a $606 million operating loss in the prior-year period. The company reported a net income of $6.29 billion, compared to a $1.68 billion net loss in the six months ended 2020. Its EPS amounted to $5.39, compared to a $1.57 loss per share during the same period last year. Its EPS and EBIT increased at CAGRs of 5.5% and 14.3%, respectively, over the past three years.
A $136.28 billion consensus revenue estimate for next year represents a 3.6% increase year-over-year. WBA’s EPS is expected to increase 11% year-over-year to $4.75 in its fiscal year 2021. Also, the stock has returned 160.7% over the past year and 44.1% so far this year.
In terms of forward EV/Sales, MT’s 0.54x is 69.1% lower than the 1.73x industry average. In addition, the stock’s 2.75x forward P/E is 81.6% lower than the 14.89x industry average.
It is no surprise that MT has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has an A grade for Growth, Sentiment, and Momentum. In the A-rated Steel industry, it is ranked #4 of 33 stocks.
In addition to the POWR Ratings grades we have just highlighted, you can see the MT ratings for Stability, Value, and Quality.
Note that MT is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
RIO shares were trading at $73.32 per share on Wednesday morning, up $0.62 (+0.85%). Year-to-date, RIO has gained 9.09%, versus a 19.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.