My GARP Framework: The Two Turbines of Long-Term Returns (1) EPS Growth and (2) Multiple Expansion
I’ve been trying to formalize how I think about GARP investing.
To me, long-term returns are driven by two turbines:
- EPS growth
- Multiple expansion/contraction
A company can compound EPS at 20%+ and still produce mediocre returns if you buy it at 35x earnings and it eventually trades at 15x. On the other hand, strong EPS growth combined with even modest multiple expansion can produce exceptional returns.
That’s pushed me toward looking for companies with:
- 20%+ expected EPS growth over the next 3–5 years
- Positive 1M / 3M / 6M estimate revisions. It doesn’t need to be perfect across every period, but positive revisions in aggregate over the past six months are a major bonus in my experience. At minimum, it suggests the earnings trajectory is improving and creates a higher probability we get multiple expansion.
- A strong history of beating quarterly estimates. If a company consistently beats and raises, it is often a sign the Street is still underestimating the business.
- 10%+ operating margins. I use this as a rough business-quality filter. Companies with healthy operating margins generally have a much better chance of becoming strong cash-generating machines.
- A clean balance sheet. Another quality filter, but also often a reflection of capable capital allocation and management discipline. I can write more about what I consider a “clean” balance sheet if there is interest.
- Minimal dilution. Some dilution is fine if it is being used to fund attractive investments or align management incentives, but persistent dilution can be an absolute killer of per-share returns.
- Non-cyclical businesses. I generally find it much harder to identify durable compounders in highly cyclical industries like oil, mining, and other commodity businesses.
- A reasonable starting valuation. Staying below roughly 40x forward earnings dramatically improves the odds that future EPS growth actually translates into strong shareholder returns. Hard to get multiple expansion in most cases when the multiple is already ~80x
The ideal setup is where earnings estimates are still moving higher while the market has not yet fully rewarded the business with a premium multiple.
If you can identify these characteristics probability of outsized returns are heavily skewed in your favor (but never guaranteed). The rerating catalyst is almost always is triggered by large new contract, earnings beat or guidance.
I tend to find these situations more often in small- and micro-cap names, (for example, stocks I’ve written about in the past, $DBOXF / $DBO.TO, or $LQDA) where the Street may simply not be paying close enough attention yet or overly pessimistic about some stormy cloud you have the conviction & foresight to see through.
For this exercise, though, I used a few larger-cap companies I like: $UBER, $RDDT and $ABNB - mostly because they have enough analyst coverage to give us reasonably robust forward estimates through 2031.
I then looked at what the five-year return profile could look like under different terminal P/E assumptions.
The results were pretty interesting.
$RDDT — 2031 EPS Scenario
15x P/E → $255 price → 7.5% 5Y CAGR
20x P/E → $341 price → 13.8% 5Y CAGR
22.5x P/E → $383 price → 16.6% 5Y CAGR
25x P/E → $426 price → 19.0% 5Y CAGR
30x P/E → $511 price → 23.5% 5Y CAGR
$UBER — 2031 EPS Scenario
15x P/E → $152 price → 14.9% 5Y CAGR
20x P/E → $203 price → 21.7% 5Y CAGR
22.5x P/E → $228 price → 24.6% 5Y CAGR
25x P/E → $254 price → 27.3% 5Y CAGR
30x P/E → $304 price → 32.0% 5Y CAGR
$ABNB — 2031 EPS Scenario
15x P/E → $211 price → 2.8% 5Y CAGR
20x P/E → $282 price → 8.9% 5Y CAGR
22.5x P/E → $317 price → 11.5% 5Y CAGR
25x P/E → $352 price → 13.8% 5Y CAGR
30x P/E → $422 price → 18.1% 5Y CAGR
Does anyone else use a similar framework?
Any companies are you seeing today that fit most of these criteria?
Any critiques on where this framework break down?
Follow me on X for more content like this. Trying to build a track record and share my ideas and process. I have nothing to sell you.
https://x.com/gz\_cap/status/2088686356012650652?s=46&t=ptp3dlurmR-41SfbNYXq6A