ETFs
Invest in the highest growth stocks, avoid overvalued stocks
If you’re looking to invest in some of the fastest growing stocks in the market but want to avoid stocks that have gotten ahead of themselves and become overvalued during the current bull market, a GARP (growth at a reasonable price) ETF like the quality iShares MSCI USA ETF GARP (BATS: STLG) could be exactly the solution you are looking for.
This relatively little-known ETF from BlackRock’s iShares combines elements of growth and value investing and has seen a whopping 43.2% gain over the past year.
I’m bullish on this little-known ETF because of its scintillating performance over the past year, strong track record over the past three years, reasonable approach to growth investing, and modest expense ratio . Additionally, the ETF is highly rated by TipRanks’ Smart Score system, and sell-side analysts also view it favorably, giving it a Moderate Buy consensus rating.
What is GARP investing, anyway?
Popularized by legendary Fidelity portfolio manager Peter Lynch, GARP investing aims to provide investors with the “best of both worlds” by combining the characteristics of growth investing and value investment. GARP investors favor investing in companies generating strong revenue and earnings growth and trading at reasonable valuations.
As GARP investors seek to capture the benefits of top growth stocks, they aim to avoid frothy stocks with eye-popping valuations, which have become more common in a market that is now trading at record highs. This sound strategy can potentially alleviate some of the risk and volatility that typically accompany these higher-risk types of stocks if the market contracts.
While these GARP stocks are certainly not immune to a market correction, they should hold up better than stocks trading at more egregious valuations or stocks that are unprofitable.
STLG perfectly summarizes the principles of this strategy in ETF form. According to iShares, STLG invests in an index of “large- and mid-cap U.S. growth stocks with favorable value and quality characteristics.” STLG seeks to give investors “exposure to growth companies at a reasonable price, balancing growth with value and quality characteristics to avoid companies with unsupported valuations.”
Essentially, this strategy gives investors exposure to some of the most valuable growth stocks in the U.S. market while avoiding exposure to particularly overvalued stocks.
Impressive performance from the start
This strategy of investing in high-quality growth stocks while avoiding certain stocks that have seen excessive gains during a multi-year bull market appears to be working well, given STLG’s strong performance thus far.
The story continues
The ETF launched in January 2020, so it hasn’t been around long enough to establish a very long performance history, but its early results have been encouraging.
As of May 31, STLG had returned an impressive 14.9% over a three-year period. This beat the broader market by a wide margin. For comparison, the Vanguard S&P 500 ETF (NYSEARCA:VOO) returned 9.6% per year over the same period.
Past performance is of course no guarantee of future results, and it remains to be seen whether STLG can continue to outperform the broader market over a longer time horizon, but it looks promising so far based on this comparison over three years.
STLG Portfolio
STLG owns 164 stocks and its top 10 holdings represent almost half the fund (48.4%). You can view an overview of STLG’s Top 10 Titles below.
As you can see, STLG owns many of the biggest growth stocks that have driven the market to new highs over the past year, like its top stock Nvidia (NASDAQ:NVDA) and top 10 additional titles like Adobe (NASDAQ:ADBE), Applied materials (NASDAQ:AMAT), Broadcom (NASDAQ:AVGO), and Eli Lilly (NYSE:LLY). So, just because the fund takes valuation into account doesn’t mean investors should miss out on some of the most attractive stocks on the market.
While these stocks don’t have the types of valuations that purely value investors seek, it appears the fund’s strategy of balancing value and growth is working well, as many of these stocks have performed well. exceptional during the period. last year. Nvidia burning is up 206.9% over the past 12 months, while Broadcom broke up with a gain of 114.8%, and Eli Lilly shares nearly doubled.
TipRanks’ Smart Score system also generally holds these stocks in high regard. THE Smart score is a proprietary quantitative stock rating system created by TipRanks. It rates stocks from 1 to 10 based on eight key market factors. A score of 8 or higher equates to an Outperform rating.
As you can see, seven of STLG’s top 10 stocks receive Smart Scores equivalent to Outperform, and Broadcom, Eli Lilly, and KLA Corporation (NASDAQ:KLAC) all receive “Perfect 10” smart scores.
STLG itself receives an ETF Smart Score equivalent to an outperformance of 8 out of 10.
What is STLG’s expense ratio?
STLG has a reasonable expense ratio of 0.15%, meaning an investor in the fund will only pay $15 in fees on a $10,000 investment per year. Assuming STLG returns 5% per year in the future and maintains this expense ratio, an investor allocating $10,000 to STLG would pay a reasonable amount. $85 fee over the next five years.
Is STLG Stock a Buy, According to Analysts?
When it comes to Wall Street, STLG earns a Moderate Buy consensus rating based on 140 Buys, 25 Holds, and no Sell ratings assigned over the past three months. THE STLG stock average price target of $56.54 implies 15.8% upside potential from current levels.
Takeaways
In conclusion, I am bullish on STLG, given its strong, market-beating performance over the past three years and the fund’s sound strategy of investing in blue-chip growth stocks while keeping an eye on valuation. This has resulted in an attractive portfolio of securities.
STLG allows investors to access some of the most exciting growth stocks on the market while avoiding the pitfalls of investing in some of its frothiest stocks. I also like the Smart Score equivalent to the ETF’s outperformance and its favorable outlook from analysts.