Enhancing GARP Investing: Creating a New and Improved PEG Ratio

Abstract

In this article, we unveil a new factor to enhance alpha for GARP investing. Our factor significantly enhances the original PEG ratio with the following updates: we utilize free cash flow instead of earnings; we consider intangible assets; and we use a forward-looking expected growth rate instead of a backward-looking historical growth rate. We then demonstrate that our new factor is significantly more robust than the PEG ratio, and that GARP investors can replace the PEG Ratio with our new factor in their models to capture a significant expected increase in alpha.