There's no denying that 2022 has been a brutal year for the stock market. With inflation raging and the Federal Reserve taking a hawkish stance, it's not surprising that growth stocks have seen the brunt of the damage.
However, investors know that challenging market environments create opportunities to buy fantastic companies that have been unfairly punished at bargain prices. And those who want to take advantage of this dislocation should consider growth at a reasonable price (GARP) stocks.
GARP stocks blend growth and value investing – combining the best of both worlds.
The GARP approach can reduce the downside risks of growth investing by filtering out overvalued companies that are most vulnerable to steep losses when market conditions turn sour or the firm has a bad earnings report.
And it can also help investors avoid "value traps." In other words, value stocks that look deceivingly cheap because the underlying business or industry is in decline.
In order to find the top GARP stocks to buy now, we used Fidelity's screener to identify names with below-market forward price-to-earnings ratios and earnings growth estimates of 10% or above for the full fiscal year. And then we compared this information against the Stock News POWR Ratings system, which utilizes 118 different factors to determine which stocks are most likely to outperform.
With that in mind, here are seven great GARP stocks that are reasonably priced and expected to grow earnings by at least double digits over the next year. In addition, each is rated Buy in the POWR Ratings system due to their respective strength across a variety of measures, including momentum, value and quality.
Data is as of May 22.
ON Semiconductor (ON, $56.46) designs and builds intelligent sensing and power technologies for its customers in the automotive, telecom, aerospace and medical industries.
A major reason that ON should be on the radar of investors seeking out GARP stocks is that it provides exposure to the electric vehicle (EV) industry. ON Semiconductor supplies a variety of products for EVs, including silicon carbide-based power modules for acceleration, inverters, LiDAR (remote sensing technology), chargers, body electronics and the powertrain.
Currently, the company expects automotive revenue to grow at a 17% annual rate over the next three years. This growth should persist well into the decade as EVs are projected to outsell gas-powered vehicles by 2028, according to Credit Suisse.
The company's other major segments are also doing well due to strength in end-markets like 5G, cloud computing, power generation, and factory automation.
In the first quarter of 2022, ON reported 31% year-over-year revenue growth and adjusted earnings per share (EPS) that more than tripled from Q1 2021. For the full year, analysts, on average, are forecasting $4.89 in EPS and $8 billion in revenue which equates to annual growth of 65.7% and 18.7%, respectively.
Despite such strong earnings momentum, the stock's price is the same as it was six months ago. This has led to very favorable valuations for ON Semiconductor. Its forward price-to-earnings ratio is currently at 11.5, significantly less than the S&P 500's P/E of 16.7.
This combination of value and growth makes ON an ideal GARP stock. Historically, the stock's forward P/E has vacillated between 20 and 30, but this opportunity is likely due to broader weakness in tech and semiconductor stocks. However, ON's results and strong prospects for its customers' end-markets mean that the company will continue delivering above-average growth for many years.
ON Semiconductor has an overall B rating in the POWR Ratings system, translating to a Buy. B-rated stocks have posted an average annual return of 21.0% since 1999, which compares favorably to the S&P 500's average annual gain of 8%. Check out ON's complete POWR Ratings breakdown, including component grades for growth, sentiment and momentum.
Freeport-McMoRan (FCX, $36.31) is a producer of gold, molybdenum and copper, with operations in North America, South America, Africa and Asia. In 2021, the company produced 3.8 billion pounds of copper, 1.4 million ounces of gold and 82 million pounds of molybdenum.
Overall, copper accounts for 75% of FCX's total revenue. Therefore, it's not surprising that the stock enjoyed spectacular gains over the last two years as copper prices rose 65%. However, copper prices are down by about 15% since March due to COVID-related lockdowns in China and concerns that the global economy may be slowing. As a result, shares of FCX are off around 30% from their late-March peak near $52.
Even at these lower copper prices, Freeport-McMoRan remains very profitable – and one of the best stocks to buy for 2022. In Q1, the company had production costs of $1.33 per pound, which are expected to average around $1.44 per pound for the full year. This is still well below the current price of copper (running around $4.27 per pound). And in the first three months of 2022, the company increased copper production by 10% on a year-over-year basis.
This is leading to very strong cash flow for Freeport-McMoRan. In Q1, it generated $1.7 billion in operating cash flow, up 57% over the year prior. And, the company is forecasting $8.6 billion in operating cash flow for all of 2022, assuming an average copper price of $4.75 per pound. This could prove to be conservative if inflation remains a concern and the Chinese economy returns to normal.
FCX should also appeal to value investors as it has a forward P/E of 9.4 – significantly cheaper than the market average. It also has a low debt-to-equity ratio of 0.7. The company also has $10 billion in cash that can be used to increase its $3 billion buyback, pay down debt, boost dividends or increase production.
Freeport-McMoRan is another of the B-rated (Buy) GARP stocks in the POWR Ratings system. In addition to boasting a Value Grade of B for its cheap valuation, FCX has a Quality Grade of B due to its positioning as one of the largest and lowest-cost producers of copper.
It's also not surprising that Wall Street analysts are bullish on the stock. They give it a consensus price target of $51, implying 40% upside. Check out FCX's complete POWR Ratings.
NVR (NVR, $4,262.41) is a homebuilder that primarily operates on the East Coast, constructing condos, townhouses and single-family detached homes. Its most well-known brand is Ryan Homes.
The company has a unique strategy that is appealing to investors and provides more downside protection during adverse market conditions. Unlike most traditional homebuilders who have large land holdings, NVR doesn't buy land. Instead, it buys options to purchase land and only exercises these options when it decides to build.
This makes NVR more of a pure-play among housing stocks. And changes in the value of these holdings can be more impactful to the business than operating results from homebuilding.
Another positive aspect of NVR is its regional focus which leads to higher margins, lower costs and faster turnover. The company also has its own factories for building materials that are advantageously located to maximize efficiency. This is helping the company get through current supply-chain issues.
This differentiated model is also leading to outperformance for shareholders. Over the last decade, NVR is up more than 420%, while the SPDR S&P Homebuilders ETF (XHB) is around 185% higher.
NVR should also have considerable appeal to investors seeking out the best GARP stocks as the company is forecast to earn $508.41 in EPS and $10.4 billion in revenue in 2022. This would mark improvements of 58.6% and 19%, respectively, over 2021. Even with this earnings growth, the company has a very attractive valuation, as evidenced by its forward P/E of 8.4. And NVR's low debt, high margins and favorable operating structure should also appeal to value investors.
The POWR Ratings system gives NVR an overall B (Buy) rating. Included in this is a Sentiment Grade of B, signaling Wall Street analysts are very bullish on the stock. The pros have a consensus price target of $5,900 on NVR, implying 20% upside to current levels. Additionally, not one of the four analysts covering the stock have a Sell rating on NVR. Here are the complete POWR Ratings for NVR.
Micron Technology (MU, $68.90) is one of the leading makers of DRAM and NAND memory chips. These chips are found in all sorts of devices and products including smartphones, PCs, consoles, vehicles and data centers.
MU stock is down by 26% so far in 2022, which is in line with the sector's year-to-date performance. This weakness is due to fears of a slowdown in tech spending amid tighter monetary policy and rising recession risks. While there certainly are signs of a deceleration in spending on technology among consumers, there is no evidence yet of slowing on the enterprise side.
And for Micron, this enterprise growth is likely more than enough to offset softness on the consumer side. The company is forecasting total DRAM demand to grow in the mid-to-high teens and NAND demand to grow close to 30% annually through 2025. This is due in part to explosive growth in its data center and automotive segments.
Technologies like artificial intelligence (AI), machine learning and cloud computing require massive amounts of memory. As a result, MU's data center business saw 60% year-over-year revenue growth last quarter. Spending on these technologies is only in its early innings and is increasingly becoming a requirement for companies to stay competitive.
Even though it is already the leader in the automotive memory market, this segment still offers significant growth potential for Micron. Cars are increasingly becoming electronic, and many of these require memory. However, the real upside comes when considering autonomous driving. So much data will constantly be received, processed, stored and transmitted from cars to satellites and back. This will initially be stored on the car's memory system and then later in the cloud, with both steps requiring the chips that Micron makes.
Normally, such strong near-term growth and longer-term upside comes with a tradeoff in terms of value. This is not the case with MU, which makes it one of the best GARP stocks to buy right now. Micron has a forward P/E of just 7.2. It also has above-average profit margin of 29% that should persist given the company's falling per-unit costs with increased production and strong demand – all of which leads to pricing power.
Included in the tech stock's overall B (Buy) rating in the POWR Ratings system is a Growth Grade of B. This is consistent with analysts' average predictions for fiscal 2022 earnings of $9.56 per share and revenue of $33.7 billion – up 58% and 21% year-over-year, respectively. See the full rundown of MU's component grades in the POWR Ratings universe.
Olin (OLN, $62.55) is an American chemical company that manufactures and sells products like ammunition, chlorine and sodium hydroxide. Its customers include the U.S. government, defense companies, wholesalers, retailers and industrial companies.
Chemical companies tend to perform well in inflationary environments because they have pricing power. This is evidenced in OLN's latest earnings report that showed the company's earnings per share soaring 64% year-over-year, while revenue was 28% higher. And both figures beat analysts' expectations.
Analysts believe this momentum will continue throughout 2022 – making Olin one of the best materials stocks to buy this year. Consensus estimates are for OLN to report full-year earnings of $9.92 per share and revenue of $9.9 billion, which would be increases of 22% and 11%, respectively.
OLN also recently struck a partnership with Plug Power (PLUG) that could unlock a major growth opportunity in the future. OLN produces hydrogen as a byproduct of one of its processes, and companies like PLUG believe that hydrogen has the potential to be a source of clean fuel for transportation and power generation. And, there's likely to be more interest in these types of initiatives as rising energy prices make alternative energy more viable.
In addition to its strong growth prospects, OLN is also solid from a value perspective – which is why it is on this list of top GARP stocks. Shares are trading at a low forward P/E of 6.3, as well as a price-to-free cash flow ratio of 5.6, well below similar metric's for the broad market.
Even more attractive for investors: In Q1, the company bought back 3% of its float and plans to continue doing so for at least the next four quarters, providing an EPS tailwind.
A Quality Grade of A helps make up OLN's overall B (Buy) rating in the POWR Ratings Universe. This is due to its commanding market share in certain categories and success in increasing operating margins to above 20% from single-digits earlier in the pre-pandemic period.
Energy stocks have performed the best so far in 2022, with the Energy Select Sector SPDR Fund (XLE) up 50% for the year-to-date, compared to an 18% decline for the S&P 500. This is a big change after many years of lagging returns. Between 2014 and 2020, the S&P 500 roughly doubled, while XLE was down by about 5%.
Entering 2022, there were already bullish fundamentals for energy thanks to strong demand and supply that had been reduced during the pandemic. And these bullish dynamics became even more pronounced following Russia's invasion of Ukraine. This conflict is only adding to demand for North American energy as sanctions against Russia take effect.
APA (APA, $41.66), as one of the largest producers of oil in North America, is a major beneficiary of these developments. In Q1, the company produced the equivalent of 404,000 barrels of oil per day that resulted in adjusted earnings of $1.92 per share – more than double its EPS from the year prior.
Compared to Q1 2021, oil and natural gas production were 4% and 8% higher, respectively. But, the biggest factor in its earnings boom was the appreciation in the average selling price of oil which increased from $59.62 per barrel in the first quarter of 2021 to $100.31 per barrel in the first three months of 2022.
APA also appeals to investors looking for the best GARP stocks because it is projecting free cash flow of $2.9 billion in 2022 based on an average selling price of oil around $100 per barrel. The company will use these proceeds to pay off debt and return money to shareholders.
Last quarter, for instance, APA retired $1.1 billion in debt and bought back $260 million of shares. It's also been raising its quarterly dividend over the past year, going from 2.5 cents per share to its current 12.5 cents per share payout. Overall, these moves are signs of a disciplined management team that is focused on long-term, shareholder returns.
APA is rated a B (Buy) in the POWR Ratings system. Part of its overall rating includes a Momentum Grade of A and an Industry Grade of B. Many stocks in the Oil & Gas Industry have strong momentum grades due to strength in the underlying commodities. Within the sector, APA is ranked #9 out of 98 stocks. See the full list of the top Oil & Gas stocks in the POWR Ratings universe.
Steel Dynamics (STLD, $75.91) is one of the largest American producers of steel. It uses electric arc furnaces and recycled scrap as the main input and that leads to lower costs and lower carbon emissions – especially when compared to traditional blast furnaces.
This also means that it's in a better position than traditional steelmakers who rely on old-school, blast furnaces and have to buy coal and iron ore that have seen significant price increases recently.
The most notable impact is in Europe. Here, many steel companies are running below capacity as governments look to prioritize power for households rather than industrial use given shortages and soaring prices.
While supply is constrained, demand remains strong – especially in America due to tariffs, the recently passed infrastructure package, and a strong housing market. And these factors are all showing up in STLD's earnings reports.
In Q1, Steel Dynamics posted $6.02 per share in earnings which topped analysts' consensus estimates and were 187% higher than in Q1 2021. Revenue was also up 51% year-over-year. For the full year, analysts are forecasting $19.29 in EPS and $22.9 billion in revenue, which equates to annual growth of 20% and 24%, respectively.
For much of 2022, STLD was an outperformer in a weak market. However, this changed in mid-April as the market became increasingly concerned about growth risks due to tighter monetary policy. Shares are off about 24% from their April 21 peak above $100, but remain 22% higher on a year-to-date basis.
Amid the most recent pullback, though, STLD has become quite cheap, with a forward P/E ratio of 3.5.
In the current market environment, investors are favoring companies with strong cash flow. Steel Dynamics stands out as it produced $1.9 billion in free cash flow on a trailing 12-month basis – quite impressive given its total market cap of $14.3 billion.
Given this combination of growth and value, it's not surprising that STLD is B-rated in the POWR Ratings system, the equivalent of a Buy. In terms of component grades, STLD has a Quality Grade of B due to it being one of the top North American producers with the lowest costs.
Wall Street sees plenty of upside ahead for one of the best GARP stocks to buy right now. The consensus price target of $110 sits almost 45% above STLD's current price.The stock is also well-regarded by Wall Street analysts, who have a consensus price target of $110, implying a 42% upside. Check out STLD's complete POWR Ratings.
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