Finding companies with excellent growth prospects that also happen to be cheap is the dream of every investor. Having your cake and eating it is proverbially difficult, however, and it is easy to choke in the process.
We know because we’ve tried. At the start of the year we waved goodbye to our Neff stock screen which – inspired by American investor John Neff – used price/earnings (PE) ratios and historic and projected profit growth to select ‘winners’. In reality, the screen posted an absolute loss in three of the past five years, and underperformed the All-Share in five of the past seven.
Investors' Chronicle Alpha has also tried to pin down these slippery stocks. The growth at a reasonable price (GARP) screen prioritises a metric known as PEG. The exact calculation can vary, but in its purest form it focuses only on valuation of forward earnings, but the version of PEG used in our small-cap Alpha screens refers to a company’s historic PE ratio divided by its two-year forecast profit growth.