This Growth Investing Strategy Delivered 113% Returns Last Year | Ishmohit at @SOICfinance is a Fan😍

so I was watching a video on so so's YouTube channel I think this was last month and everything was going fine until the point where ishm moit said this is one of my favorite personal screens one of my favorites so I figured ishit was referring to the g style of investing and to say it's one of his favorites is quite a statement which got me thinking is gar I mean I have heard of GARP dozens of times but honestly but that changes today and in this video we'll understand what GARP is what are the foundations the building blocks of the strategy and most importantly I'll take you through four different screeners and mind you three of those screeners came back with an absolutely shocking one-year return of over 100% so there's a lot to learn from this video we have ishm Mo's blessings so let's begin GP GARP it's an acronym that stands for growth at reasonable price it's pretty self-explanatory but let me give you a quick background so gar as an investing style lies somewhere between value and growth investing now if you recall value investing as a framework revolves around looking for companies that are trading below the intrinsic value while growth investing focuses on companies that can deliver above average growth in fact to draw the difference between the two two approaches while the value investor tries to understand what is the stock worth today a growth investor is trying to assess what will the stock be worth 5 to 10 years from now and that's where the concept of GARP investing comes in as this style looks to combine the value and growth mindset to offer The Best of Both Worlds as a strategy G was popularized by the famous investor Peter Lynch and one of the most important Tools in GARP investing comes from his book one upon Wall Street where he refers to a price upon earnings to growth ratio which is popularly called the PEG ratio I'll come to the PEG ratio in just a few minutes but let's be clear on one thing the focus here is not on finding cheap companies but it's more on finding companies where the growth is being underpriced it's important to understand this difference and I'm sure this part will get more clearer as we explore some ways of implementing agab strategy in the coming sections which brings me to M stock the sponsor of this video and one of the few stock brokers in the country that have built a zero brokerage model Yes you heard that right zero brokerage which means there's free intraday free delivery free fno free mutual funds free IPOs and a lot more and all of this can be yours by paying an account opening charge of just 999 rupees yes just 999 for all this free free free stuff and if you pay another 999 then you can also get rid of those quartly AMC charges for the rest of your life in fact the M stock website has this detailed comparison table and if you're someone who is into intraday uses Futures and options does margin trading which incredibly at msto can be as low as 6.99% then definitely check out msto as it'll help you save a lot of money but money isn't everything right trust is equally important and pleasantly M stock is backed by the Mirai asset Group which needs no introduction it has over 8 and A2 lakh users it did over 3 and A2 lakh crores of turnover and is estimated to have saved 145 crores in brokerage last year so save it trust it compare it and don't forget to try it as always the link to this platform is available in this video's description let's start with something foundational and as you might have expected a large part of the Gap investing framework revolves around growth and growth itself can be looked at in two different ways the first approach is to invest in companies that have grown their earnings per share at an accelerated Pace over the past few years but then let me tell you historic Ally the strategy has not worked as well as one might have expected that's primarily because a company's growth rate changes over time and exide industries is a good example of that with the company struggling to grow its earnings since the year 2019 which means earnings growth itself is a pretty unpredictable factor and if I add the usual manipulations and biases like calculating growth from a really low point to a really high point then it makes up for a completely screwed up model in fact evidence shows that if you're if you're going to focus on a growth rate then it's better to give a higher priority to revenue growth which is more sustainable and is more correlated over time as compared to the EPS growth a second way of measuring earnings growth and something that's very integral to the g style of investing is to look at the PEG ratio now I explained the PEG ratio in a previous video but just to recap it's a ratio that's derived by taking the price to earnings the p ratio of a company and dividing it by its EPS growth rate that is the rise in earnings per share to understand the PEG ratio utility let's apply to kpit Technologies limited so kpit Tech is presently trading at a p ratio of 71 which as a stand load number would seem pretty high to anyone including myself but when we look at it in the context of a 55% growth in EPS over the last four quarters then it does bring us close to the magical figure of one which is Peter Lynch's definition of a fairly valued business the bigger point is that while most of our screeners would have avoided a stock that is at a multiple of 70 by combining valuation and growth we now have a better view a better perspective of where the stock is and where this business is actually heading in fact the PEG ratio itself can be looked at in two ways the first is in isolation a bit like how we did it for kpit Tech and if the ratio is low lower than one then you can consider the business undervalued on the basis of its earnings forecast a second way of utilizing the PEG ratio is to do it on a relative basis that is a comparison of one stocks PEG ratio with another for instance it's like choosing between stock a which is trading at a p of 20 and its profits are expected to grow by 30% every year versus Stock B which is at an earnings multiple of just 10 and an expected earnings growth of 8% over the next few years so this makes comparisons really easy but having said this and while the mathematics is the easy part one should always account for cyclicity when examining the p ratio and when it comes to the EPS try to rely as much as possible on the future growth rather than the historical growth rate in fact I would further go on to say that since the world today is very different from when Benjamin Graham Phil Fisher or Peter Lin so and with the world in a generally low interest regime modern gar investors have become a bit accommodative and even consider a stock to be attractive if the PEG ratio is two or less in addition to growth rate and PEG ratio it's highly recommended fortifies the G strategy with additional parameters like the debt ratio that is the total liabilities divided by the total assets should not exceed 25% as per Peter Lynch there should be one or more powerful economic modes within the business that ensures sustainability and protection of profit margins the promoter shareholding should be high and handsome and we've studied the benefits of investing in owner operator businesses in a previous video and one should be very clear on the businesses you want to explore and the ones you'd like to avoid on the basis of your own preferences and your circle of of competence okay now that we have firmed up our foundations let's get on to the main event now because there is no defined G investing strategy I decided to explore not one not two but four different variations of it and eventually you and I can mix and match the variables to arrive at a more comprehensive framework the first iteration I came across was a simple screener I saw in this website a invest.com and it uses just three variables the market capitalization the PEG ratio and the eps growth rate now to replicate this in an Indian environment while the 0 to1 PEG ratio is fine let's change the growth rate to 20% and dial down the market cap to say 10,000 crores this gives us a list of 39 stocks and do notice the high sales growth and even higher profit growth a low p ratio and of course a PEG ratio of less than one now because I don't have the requisite software back testing something like this is not possible here but as a stop Gap firstly as a substitute to the current PEG ratio I use the historical three-year price earning multiple and the three-year EPS growth and secondly I used the EPS of the last year and the year before that to receive this list of 83 stocks I'm sure there are problems here but just as a portfolio and just as an academic exercise when I populate the numbers I was surprised to find that none of the 83 stocks had given negative returns in the last one year and what was even more surprising or rather shocking was to discover that as a portfolio this concoction of companies had actually delivered a one-ear return of 113% yes 113 113% is what this grouping of 83 companies which includes psus private Banks hospitals tire companies nbfcs Etc had managed to deliver in the last one year now I'm sure there are some viewers who are itching to write in the comments box that this performance was achieved in the bull market and all I can say is and this is not the only commment right do so the back testing was not done perfectly and I can't do much about it as I don't have the capital to invest in expensive software and neither do you and another comment actually there's more of an encouragement and thank you so much for that which is to explore building a small case around this strategy and some other strategies which I promise to take up in the second half of this financial year okay now that the scene is set actually the bar has been set extremely high 113% anyways let's move on to the second approach that is the gar framework ish moit revealed in his most recent video now because that video was on large businesses companies with 50,000 crores plus in market cap I'll definitely encourage you to try out other variations like 20 to 50,000 crores for midcaps and Below 20,000 crores for small caps as well okay so other than market cap s oic's Gap framework includes an year-on-year quarterly sales growth of 15% and year on year quarterly profit growth of 20% and thirdly a p multiple of less than 30 this query resulted in 16 entries most of them being Banking and nbfc stocks but because back testing is not available to me I'll not be analyzing this list now but I'll definitely do it next year when I come up with an updated video now I'm not sure if you've noticed this but ish mohit's methodology does not use the PEG ratio which was frankly a bit of a surprise to me but then I populated his query across all companies which had a current market cap of over 10,000 crores and presently of the 47 stocks that yielded 29 of them a good 62% of them had a PEG ratio between 0 and 1 and another 21% of the stocks had a PEG ratio between 1 and two I'm sure you're curious to know if s's G method managed to beat the 113% or not and I regret to inform you that they lost this battle by a good 3% and their framework could only manage 110% return over the last one year the Third G methodology I explored was on the basis of something I read in the economic Times exactly an Year back so in this case the selection of G stocks was based on a Sixpoint criteria that included the market cap that has to be over 1,000 crores the sales revenue also should be over 1,000 CR so that's another new variable for us the model requires a 5year profit growth of at least 15% the expected future profit growth should be 15% or more so another new variable we then need a PEG ratio of less than one and there should be a minimum of five analysts covering this stock I'm not sure how many of these criteria have been specifically created by ET to sell the research product but barring the last one on the number of analysts I'm sure the rest of them can surely be put on a screener including the fourth point where using a small tweak in the criteria we can forecast if the next quarters profit will be at least 15% higher than what it was an Year back again nothing's perfect but when put on a screener this query yielded me 131 stocks which I think is a bit too much which is why I'll encourage you to mix and match some of the other variables we've learned previously in the video anyways and just FYI also examined the one-ear performance of the 10 stocks that the economic Times framework had put forth in their article and the small portfolio gave me an annual return of 51% the last Gap strategy is a documented one and it is not made in India in fact there's an index named the S&P 500 GARP index that tracks companies that aderes to snp's definition of what a GARP stock looks like now I won't go into the methodology Universe constituents Etc but I'll spend a minute on the five factors they use to see if we can find something useful here so the S&P 500 gar index has a couple of growth variables and it's pretty straightforward with the methodology opting for a three-year EPS growth rate and the threeyear SPs growth rate where SPS stands for sales per share additionally the Gap Index also uses a few quality and value composite factors such as the financial leverage ratio which is calculated by taking the company's total debt and dividing it by the company's Book value then there is return on equity which uses the company's 12-month trailing EPs and divides it by the book value per share and finally there's the earnings to price ratio which is simply the 12 month trailing EPS divided by the Stock's current market price you can get more specifics in the S&P Global website and I've anyways added the document Link in the video's description but my objective of mentioning it here was for us to get a better appreciation of how different metrics and variables can make up a g strategy and why it's important to find a proper balance so that was something interesting to conclude our four examples and I hope you now have a better understanding of goop and have enough ammunition in Your Arsenal to create your own GOP strategy but let me not keep you hanging there and if I have to design a g investing framework myself then I'll definitely have a capping on the market cap so nothing below 1,000 crores I also like the idea of having a minimum level of sales which I want to keep it at at least 1,000 crores the PEG ratio is super important and I'm okay with anything between 0 and two as we learned from the S&P Gap Index we want companies where sales are growing so I want to see a 1 3 5e Sal cagr of at least 15% the EPS also needs a similar setup so a 13 5e cagr of 15% or more and finally let's add a dose of expected profits by ensuring the next quarter's earnings are higher than the last year's so plotting this as a query on screener gives me a list of 27 companies and as one might have expected the sales growth and the growth in profits are high the p ratio is all over because unlike S soic I went with the PEG ratio instead surprisingly there are not many banks in this list I also looked at the ROC the return on Capital employed and this is mostly in the 15 to 25 range the average promoter holding comes to about 55% which I think is ideal most companies are using debt to grow and the interest coverage ratio is Comfortably above three in most cases and I was happy to see the spread in sectors in this list which was wide and diverse you can access this list in the worksheet I've attached as a link in this video's description and feel free to build on the query which is also available in the same worksheet finally if curiosity is bubbling inside you on how these 27 stocks would have performed that I'm happy to report that this custom G portfolio would have delivered 115% in returns over the last one year so it was surely a very tight three-way context but the words of du [Applause] G nah I think Sanju Sher and ran all did pretty well in that cycle race so do try out the G cycle modify it track the results remember what I said earlier the object objective here is not to find cheap companies but to identify companies whose growth has been underpriced and always keep a long-term perspective when employing a gap strategy once again thank you for your time do subscribe to my newsletter if you haven't done that yet share this video in your WhatsApp groups and I'll see you very soon until then Investments and securities markets are subject to Market risks read all the related documents carefully before investing