Great growth, great value, great technicals: Do these ASX stocks have it all?

Earlier in the week, Morgan Stanley Wealth Management released a note titled Mind the GARP to not overpay for growth, focusing on the Growth at a Reasonable Price (GARP) investment strategy.

It is a timely and well-constructed note, particularly given global equity markets sit at all-time highs and, with the benefit of future hindsight, there are likely current examples of growth stocks that investors are overpaying for.

This wire, however, is not about identifying those stocks. Rather, it will focus on the ASX stocks that currently pass a GARP filter, and then add a technical analysis overlay to see which are exhibiting the strongest trends. 

As per the Morgan Stanley note, “GARP seeks to invest in stocks which exhibit strong growth potential while not being overvalued."

"As an investment style, GARP essentially sits at the intersection between Growth and Value investing, with the objective of avoiding the ‘extreme’ attributes of either of these two styles."

A quick history lesson

While GARP can be traced all the way back to the father of value investing, Benjamin Graham, the investment style was popularised by Wall Street titan and author of One up on Wall Street, Peter Lynch.

The short story is that Lynch modified the Price-to-Earnings (P/E) ratio and developed the Price-to-Earnings Growth (PEG) ratio that also takes into account a company’s earnings.

Again, as per the Morgan Stanley note:

“The PEG ratio is calculated by dividing a company's P/E ratio by its expected earnings growth rate. This metric allows investors to assess whether a stock's valuation is reasonable relative to its growth potential. A PEG ratio of less than 1 is generally considered a favourable indicator, as it suggests the stock is trading at a discount to its growth rate."

"By incorporating the PEG ratio into stock analysis, GARP investing can potentially identify companies that offer an appropriate balance between Growth and Value, and thereby provide an attractive risk-reward profile," Morgan Stanley added. 

GARP Scan

Please note: the analysis below is general in nature, for educational purposes only, and should not be considered recommendations. Past performance is not a reliable indicator of future return. Always do your own research. 

With the help of Halo Technologies (ASX: HAL), we ran a GARP scan over the ASX, looking for companies that met the model's criteria and had a market cap of over $1 billion. The exercise produced the following list. 

Fortunately for readers, the analysis doesn’t stop there. My colleague, Carl Capolingua, will now sort the list into those displaying strong technical trends, and those that are not.  

Carl’s technical take

I have grouped the GARP list into three categories based on their technicals. Note, I will provide detailed technical analysis including key levels for Attractive technical trends only. Check out this ChartWatch Primer for a detailed explanation of my technical analysis methodology.

1. Attractive technical trends – There is a well-established short-term uptrend and the long-term uptrend is either well-established or the long-term trend is transitioning from down to up. As a trend follower, these stocks are likely to meet my criteria for investment in the short-to-medium term.

Stocks in this group include: Block (ASX: SQ2), Capricorn Metals (ASX: CMM), Downer EDI (ASX: DOW), Genesis Minerals (ASX: GMD), Insignia Financial (ASX: IFL), Northern Star Resources (ASX: NST), Ora Banda Mining (ASX: OBM), Perseus Mining (ASX: PRU), Regis Resources (ASX: RRL), and Westgold Resources (ASX: WGX).

2. Neutral technical trends – The short and long-term trends are not yet well established to the upside, more upward momentum is required to confirm an attractive technical setup.

Stocks in this group include: Abacus Group (ASX: ABG), Beach Energy (ASX: BPT), Bellevue Gold (ASX: BGL), Credit Corp Group (ASX: CCP), GQG Partners (ASX: GQG), Growthpoint Properties Australia (ASX: GOZ), Iress (ASX: IRE), Newmont Corporation (ASX: NEM), Perpetual (ASX: PPT), Regal Partners (ASX: RPL), Treasury Wine Estates (ASX: TWE), and Vault Minerals (ASX: VAU).

3. Poor technical trends – There is a well-established short-term downtrend and the long-term downtrend is either well-established, or the long-term trend is transitioning from up to down. As a trend follower, these stocks are unlikely to meet my criteria for investment in the short-to-medium term.

Stocks in this group include: Bapcor (ASX: BAP), Challenger (ASX: CGF), Flight Centre Travel Group (ASX: FLT), IPH (ASX: IPH), and Woodside Energy Group (ASX: WDS).

GARP + Attractive technical trend stocks

Block (SQ2)

This is a relatively early long-term uptrend compared to some of the others in this list, but it does meet the criteria for a turnaround setup. A strong short-term uptrend, complemented by excellent price action in October (steeply rising/long trough-peak segments versus shallow/short peak-trough segments) and predominantly demand-side candles.

I would not be surprised to see some excess supply around the 14 March major peak of 130.05. Until then, happy to back this one as long as it continues to close above the short-term uptrend ribbon.

Capricorn Metals (CMM)

A well-established set of short and long-term uptrends here. The price action is more “overlappy” than what I’d typically consider ideal (trough-peak and peak-trough segments), but the strong demand-side candles in October show the market is likely moving towards a more stable state of excess demand.

Unlike Block, there are no major historical points of supply impeding progress here. I am happy to back this one as long as the price continues to close above the short-term trend ribbon.

Downer EDI (DOW)

I suggest the cleanest set of short and long-term trends so far. The market is digesting the large rise after the company’s FY24 results in late August. Big gains like these are usually positive in the medium to longer term as once the initial supply overhang is dealt with (from those selling the sudden windfall), the demand side usually pushes prices higher into a supply side vacuum.

As bottom-left-top-right as this one looks, there is a major long-term peak off-screen at 6.87 (October 2021), and of course, the 2 September peak of $5.88 will need to be dealt with before then. Overall technicals look strong here, and the next demand-side candle close above $5.80 would likely set DOW up for the next leg higher.

Genesis Minerals (GMD)

Another set of very clean short and long-term uptrends. The long-term uptrend ribbon is doing a fantastic job of acting as dynamic demand. The most recent upward push from the long-term uptrend ribbon occurred on excellent demand-side candles, and the pullback since has been very shallow.

There are no overhead point of supply, it’s all blue sky after the minor peak set on 23 October at 2.58. I am happy to back this one as long as the price continues to close above the short-term trend ribbon.

Insignia Financial (IFL)

An impeccable short-term uptrend, complimented by excellent price action and punctuated by a wall of powerful demand-side candles. The technicals since the September low are indicative of almost total demand-side control. Just the way I like it!

There is a potential major point of supply lurking off screen though, from the January 2023 peak at $3.74, but that’s still a ways off. Right now, I’m happy to back the strong demand-side showing here and continue to do so as long as the price continues to close above the short-term trend ribbon.

Northern Star Resources (NST)

I could almost just go “ditto” here. Another set of very clean demand-side dominated technicals. Possibly the cleanest set I’ve seen in this list so far. I can’t fault anything, and we’re also blue sky here, so I will simply say again that I’m happy to back the strong demand-side showing here and continue to do so as long as the price continues to close above the short-term trend ribbon.

Ora Banda Mining (OBM)

Ok, there appears to be a bit of a pattern emerging here. This is the fourth gold stock in the list, so naturally, there’s going to be some overlap in the technicals. Gold stocks are having a very good run right now – we all know that – and this might scare some who are just investigating the theme now.

Let me point out that many of these charts have been a picture of excess demand for a long time now (i.e., they’ve been rising steeply for some time). If you thought OBM was too high to buy anywhere from 30 cents, you would have missed out on an excellent run.

There are absolutely no guarantees about what's going to happen next. Trend followers understand that they may be buying at the exact top. This does not worry us! It is exactly why we also have strict risk management criteria to remove us quickly from an opportunity that hasn’t worked out – so that we may move quickly to the next strong trend!

Ditto OBM vs NST. I’m happy to back the strong demand-side showing here and continue to do so as long as the price continues to close above the short-term trend ribbon.

Perseus Mining (PRU)

(Looking down list!) Ok, three more golds to go! You will notice that there is generally a degree of mean reversion in even the strongest uptrends back towards the short-term uptrend ribbon. I don’t have a rule for how far away from the short-term trend ribbon is too far to buy – when you think about it, that would be at odds with the very nature of trend following – i.e., backing the strongest trends/statements of demand-side control.

But I accept that some may feel more comfortable buying into a strong trend closer to the short-term uptrend ribbon than far away from it. So, perhaps then PRU’s proximity to its short-term uptrend ribbon makes this one appear more prospective to you.

Everything else is a tick as per trends, price action and candles. I’m happy to back the strong demand-side showing here and continue to do so as long as the price continues to close above the short-term trend ribbon.

Regis Resources (RRL)

A nice little segue into one that is, to be fair, a little away from its short-term uptrend ribbon! You will often find in such strong showings of demand-side control that the short-term uptrend ribbon catches up to the price action rather than the other way around. So a period of sideways consolidation here to digest recent gains (and remove some of the supply from windfall traders) would not be surprising.

Otherwise, I can’t see any reason why one wouldn’t be patiently but diligently waiting for signs the next leg up is about to begin here. Another large demand-side candle and/or a close above the 25 October peak of $2.83 would likely be the trigger.

Needless to say, I’m happy to back the strong demand-side showing here and continue to do so as long as the price continues to close above the short-term trend ribbon.

Westgold Resources (WGX)

Last but not least on our list is another clean and very strong set of technicals for WGX. The powerful October push, along with the very shallow pullback in response, is the most attractive feature here. If you think about the psychology of sharp gains, of a sudden and large price rise in any asset – Economics 101 tells us that we can expect an increase in supply.

This might be true elsewhere in the economy, but it’s not always true when it comes to stocks. Almost always, that big price rise occurred for a very good reason – investors expect substantially increased earnings down the track. This is a reason to buy, yes we get that bit, but consider the supply side – it’s also a good reason to withhold supply. In the stock market, you will find that a big share price gain isn’t a reason to sell – it’s a reason not to sell.

How does this manifest itself in the price action? Exactly the long trough-peak gains and the very shallow peak-trough declines I’ve been talking about. I’m happy to back the strong demand-side showing here and continue to do so as long as the price continues to close above the short-term trend ribbon.

I'll leave you with this: If some of the charts above appear as if the horse has bolted, consider that my methodology identified strong trends in many of them some time ago. Each day, I publish my list of favourite ASX uptrends and downtrends in my ChartWatch Daily Scans article. In each article, I select a list of "Feature" uptrends and downtrends I feel warrant special attention from investors. 

See below a table containing details of if and when one of the 10 stocks above was run as a Feature uptrend, as well as the closing price on that first occasion it was run, the number of times it was subsequently run as a Feature, and the change in share price since it was first Featured. In many cases, you can see that strong trends do continue!