We recently published a list of 10 Best GARP Stocks to Buy Now. In this article, we are going to take a look at where Onto Innovation Inc. (NYSE:ONTO) stands against other best GARP stocks to buy now.
The Growth at a Reasonable Price (GARP) investment strategy focuses on identifying stocks with strong growth potential while ensuring they are not overvalued. This approach serves two primary purposes: first, it mitigates the risks associated with growth investing by filtering out overvalued companies that are more vulnerable to sharp declines during unfavourable market conditions or disappointing earnings reports. Second, it helps investors avoid “value traps” by steering clear of stocks that appear inexpensive but are fundamentally weak. By blending elements of both growth and value investing, GARP aims to deliver the best of both worlds.
Defining GARP Investing
Leading financial institutions have their own perspectives on GARP investing. According to Fidelity Investments, the GARP strategy seeks to identify stocks with strong growth potential while remaining reasonably priced based on key valuation metrics. It balances the pursuit of high-growth opportunities with disciplined valuation, ensuring that investors avoid both overpriced growth stocks and undervalued companies with weak fundamentals. GARP investors typically target companies with above-market median growth rates—both historical and projected—while keeping valuation measures such as price-to-earnings (P/E) and price/earnings-to-growth (PEG) ratios below the market median.
A February 21 insights report from investment management company T. Rowe Price’s portfolio managers further underscored the appeal of GARP investing. They emphasized that GARP stocks stand out in a market where attractive investment opportunities are often limited. Market supply and demand imbalances create consistent opportunities to acquire GARP stocks at a discount. By carefully assessing risk-adjusted compensation across asset classes, investors can strategically allocate capital to achieve superior risk-adjusted returns.
The report also highlighted key advantages of GARP stocks:
“Our analysis demonstrates that these stocks have not only generated better absolute returns, but they have also tended to trade at a discount and grow earnings faster than the broader equity market. They have also outperformed the S&P 500 Index across a wide range of market environments. Given the discount we have observed for these stocks, and their demonstrably higher ROE, it follows that these stocks would tend to perform better than the broader market over longer time periods. What makes them even more attractive to us, as portfolio managers, is that GARP stocks have generated not only better absolute returns, but better risk‑adjusted returns (as measured by the Sharpe ratio from 1990–2024).”
Our Methodology
Our methodology for identifying GARP stocks combined valuation, growth, and fundamental strength. We focused on companies with a market capitalization of at least $2 billion and shortlisted those with positive earnings growth over the past five years and an expected EPS growth of over 15% for the current year. Regarding next financial year (FY), for firms with more than six months remaining in their fiscal year, we used FY 2025 earnings estimates, while for those with six months or less left, we relied on FY 2026 estimates. To ensure reasonable valuation, we selected stocks with a forward price-to-earnings (P/E) ratio between 15 and 25 and a P/E-to-growth (PEG) ratio below 2. Additionally, we included only companies with a long-term debt-to-equity ratio below 1.0. Stocks that met these criteria were further filtered for a potential upside of at least 20%. Finally, from this refined list, we ranked the top 10 stocks in ascending order based on hedge fund ownership, using Q4 2024 data.
Note: All pricing data is as of market close on March 7.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A technician observing a macro defect inspection process, the precision of the company’s systems.
Onto Innovation Inc. (NYSE:ONTO)
Fwd. P/E: 21
Expected EPS Growth Next FY: 21%
Number of Hedge Fund Holders: 50
Upside Potential: 86%
Onto Innovation Inc. (NYSE:ONTO) specializes in designing, developing, and manufacturing inspection and measurement tools for the semiconductor industry. Its products help ensure the quality of both patterned and unpatterned wafers, detect defects, and analyze production processes. The company also offers software solutions for process control and lithography systems used in wafers and panel substrates.
On February 6, Onto Innovation Inc. (NYSE:ONTO) reported stronger-than-expected Q4 2024 financial results. Revenue for the quarter reached $264 million, marking a 21% year-over-year increase, while adjusted EPS came in at $1.51, both exceeding consensus estimates. For Q1 2025, the company expects revenue between $260 million and $274 million, implying around 1% quarter-over-quarter growth at the midpoint, while adjusted EPS guidance of $1.40 to $1.54 suggests a 3% decline from Q4.
Despite the solid results, the stock fell over 11% on February 7. Combined with the 14% sell-off on January 27 related to DeepSeek concerns, the stock is down 20% year-to-date, now trading at $133, near the lower end of its 52-week range.
Onto Innovation Inc. (NYSE:ONTO) currently has a consensus Buy rating with a 1-year median price target of $247.50. Acknowledging near-term AI-driven inventory digestion, an Oppenheimer analyst revised his earnings estimates and price target downward to $240 from $275, while maintaining an Outperform rating, expecting demand to rebound in 2026.
Overall, ONTO ranks 6th on our list of best GARP stocks to buy now. While we acknowledge the potential of ONTO to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ONTO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.