Using this investment strategy, Thomas Rowe Price Jr. discovered companies such as Black & Decker, Merck, Avon and Xerox. Back in the ’40s, ’50s and ’60s, these were speculative stocks that no one, except Price, had the guts to buy.

They all went on to rise between 6,184-23,666%. And today, Price’s company manages over $269 billion in assets.

Jim Oberweis, a famous portfolio manager from Chicago, used the same investment strategy that Price did. Since 1987, his flagship fund has averaged a 12.48% gain. A $10,000 investment with Oberweis in 1987 is now worth $111,833.

The investment strategy that made both of these men (and their investors) wealthy many times over is known as GARP — growth at a reasonable price.

GARP combines value and growth investing into one neat little package. A GARP investor wants to own high-growth companies. But he doesn’t want to overpay for the right to own that growth. For instance…

Price bought companies with expanding profit margins, quarter-over-quarter sales increases and a history of accelerated earnings growth (both year over year and quarter over quarter). If a company met these requirements, he wasn’t so concerned if it happened to have a high P/E ratio or not. The theory was simple…

If a company was growing quickly enough, it would narrow the gap between earnings and price over time.

Oberweis has a similar, but more stringent, philosophy. As he said in an interview a few years ago, “We’re looking to buy companies for a P/E not higher than half the rate of growth. So if a company is growing at 50% annually, we don’t want to pay a P/E higher than about 25.”

In addition to buying growth companies for a reasonable price to earnings, Oberweis also insisted on:

1. Rapid earnings growth
2. Future growth potential
3. Earnings acceleration
4. Low relative price/sales ratio
5. Quality earnings
6. Top quartile of relative strength
7. Rapid revenue growth

These criteria make up what Jim calls his “Oberweis Octagon.” Each investment decision must pass his octagon test before it makes it into his portfolio. And while the name is somewhat silly, the results he has racked up are nothing to snicker at. Some people would sell their firstborn son for a 12% annual return over 19 years.

So what stocks might Price and Oberweis buy today?

To answer that, I created a GARP screen of my own (based on both Price’s and Oberweis’ investment criteria). I looked for:

1. Market capitalization of $1.5 billion or less
2. Net profit margin had to improve in each of the last two years
3. Earnings per share growth of 25% or more in each of the last two years
4. Sales growth of 25% or more in the last two years
5. Quarter-over-quarter sales growth
6. P/E of 40 or less
7. Relative strength in upper quartile

Only five companies came up on this GARP screen. They are:

• American Oriental Bioengineering, Inc. (AOB:AMEX)
• Epicor Software Corp. (EPIC:NASDAQ)
• First Regional Bancorp (FRGB:NASDAQ)
• Pinnacle Financial Partners (PNFP:NASDAQ)
• TALX Corp. (TALX:NASDAQ)

(Note: All of these stocks rank in the upper quartile in terms of relative strength.)

If you are looking for a short list of growth stocks at reasonable prices, I would start here. Each of these companies has awesome growth numbers. And unlike many so-called growth opportunities, these actually have real earnings and improving profit margins to boot. That says they have established products, services or brands that command premium prices. It also says management runs the business with the shareholder in mind.

That is a rare combination on Wall Street these days. Just remember one thing if you decide to invest with a GARP bent…

Both Oberweis and Price made their fortunes by holding onto their stocks for years, not months or weeks. You don’t walk away with 23,000% gains in a few weeks. As Price once famously declared:

“Buy stocks of growing businesses, managed by people of vision, who understand significant social and economic trends and who are preparing for the future through intelligent R&D. Sell when the company no longer meets your buying criteria.”

Good investing,
James
October 26, 2006

P.S.: Jim Oberweis is still alive and kicking. In case you are interested in the top holdings in his Emerging Growth Fund, here they are:

1. Focus Media Holding (FMCN:NASDAQ)
2. Ceradyne (CRDN:NASDAQ)
3. Carrizo Oil and Gas (CRZO:NASDAQ)
4. aQuantive (AQNT:NASDAQ)
5. Aspreva Pharmaceuticals (ASPV:NASDAQ)

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