BMO says 'Growth at a Reasonable Price' is the right strategy now and these are the top GARP stocks

Published Fri, Feb 11 20229:56 AM EST

2022 is about stock picking, and one strategy from BMO Capital Markets could help navigate the rocky market now. The major averages had a rough start to the year as companies juggle a hawkish Federal Reserve pivot, rising interest rates and 40-year-high inflation. "All of these market attributes bring stock selection to the forefront, in our view, and suggest to us that an active investment approach will likely be crucial in identifying viable investment opportunities," said Brian Belski, chief investment strategist at BMO Capital Markets. Looking forward, the firm said a growth-at-a-reasonable-price, or GARP, strategy makes sense with the current market backdrop. This strategy employs a mix of both growth and value investing metrics. "The differentiation of [next 12 months] earnings growth among S & P 500 companies has been sharply rising, recently climbing to its highest level since the onset of the pandemic, while valuation dispersion has exhibited a similar trend and currently stands well above its post-financial crisis average. This indicates to us that companies are operating at considerably different fundamental rates," Belski added. BMO Capita Markets' GARP screen includes buy-rated names with an estimated price-to-earnings ratio less than the median S & P 500 value over the next 12 months. It also has earnings growth estimates for the next year higher than the median S & P 500 value. Plus, the stocks' price-earnings to growth ratio, commonly called the PEG ratio, is also less than the median for the 500-stock average. PEG is a stock's price-earnings ratio divided by the expected long-term growth rate in earnings per share. The higher the PEG ratio, the more investors are willing to pay for a name relative to its long-term earnings growth expectations. "GARP has produced favorable long term total returns, on average, relative to the overall market," Belski said. Take a look at BMO's list here. The firm's GARP screen encompasses all sectors. There's a slight cyclical tilt, however, as technology makes up a fourth of the names. Industrials, consumer discretionary and financials make up about half of the screen. Technology picks include Broadcom , Micron Technology and Skyworks Solutions . Shares of Micron are down just 1% this year, dodging some of the pain that growth pockets of the market have experienced. Vaccine-maker Pfizer and healthcare giant Cigna also made BMO's GARP screen. On Tuesday, Pfizer said it expects $54 billion from the sales of its Covid vaccine and treatment pill in 2022. BMO also favors insurance company Anthem , EOG Resources , Fortune Brands , Ross Stores and Freeport-McMoRan . — with reporting from CNBC's Michael Bloom.

Cigna signage displayed at the company's headquarters in Bloomfield, Connecticut.

Ron Antonelli | Bloomberg | Getty Images

2022 is about stock picking, and one strategy from BMO Capital Markets could help navigate the rocky market now.