In this series, we bust the jargon and explain a popular investing term or theme. Here it’s QARP aka quality and a reasonable price.
Sage advice: QARP fans cite a saying from Warren Buffett
Is this something that will make me money?
Maybe. QARP stands for quality at a reasonable price. Money managers who adopt this strategy back companies with above-average returns, good cash flow and strong balance sheets whose shares appear to be attractively priced.
QARP fans cite this saying from Warren Buffett: ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
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What other qualities should a QARP business possess?
A barrier to entry, or ‘moat’ that helps to repel the competition.
The business may be a market leader, or have brands with a strong reputation. Some money managers also look for a business whose products or services appear to have ‘network effects’.
That is, the demand for these products or services increases, as more people become customers, or start to use the service.
The Instagram platform is one of examples of this phenomenon. In 2020, there were 1.04bn users worldwide; by 2025 this is forecast to be 1.44billion.
Why I am reading about QARP?
The ‘Magnificent Seven’ tech companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, with their stellar growth – have been the stock market stars of 2023.
But analysts are asking whether their strong share price performance – Nvidia’s shares are up by 235 per cent – may have overshadowed other companies with potential.
The interest in QARP may represent a shift away from the previous emphasis on two opposing investing styles: growth and value.
How do growth and value differ?
Growth investors seek out reassuringly expensive companies whose sales and profits seem set to outpace all others.
Value investors, on the other hand, look for companies that seem inexpensive relative to their fundamentals.
The members of the Magnificent Seven – all growth stocks – may have prospered. But other stocks in this category have been hit by rising interest rates which lessen the allure of their future profits. Meanwhile, a few ‘value’ stocks have been found to be cheap for a reason.
Where do I find QARP companies?
Sadly, nothing is ever that simple. The definition of what constitutes a QARP stock is broad. Some analysts classify Microsoft as such a stock, although its price is up by 57 per cent this year to $373. But, since a consensus of brokers that follow the stock continue to rate it as a ‘buy’, Microsoft’s valuation could be considered reasonable.
Are any UK companies seen to have QARP credentials?
Analysis by the US website Marketscreener shows some larger UK names that match the QARP criteria.
The list includes companies whose shares have risen this year – BAE, Dunelm and Jet2 – and some whose shares have fallen, including Drax and GSK. But, of course, taking a bet on any of these companies carries the usual risks.
Is there a QARP fund?
The Xtrackers Russell 1000 US QARP exchange traded fund (ETF) focuses on US firms. Top holdings are Costco, Exxon and Walmart, plus Apple, Meta and Microsoft.