BUYING GROWTH STOCKS WITH A SAFETY VALVE

For the most part, I do not have any investing bent (macro, quantitative, value, growth, momentum etc) because I feel that the market is just too dynamic and no philosophy really works all the time. Even so, I often find it hard to convince myself to buy growth stocks selling at high multiples. The problem is that one negative growth surprise and the consequent multiple contraction has the potential to destroy performance.

There are a lot of companies I really like, but the market adores them too; leading to pricey valuations. One such stock is Jain Irrigation. India has numerous and growing mouths to feed. The erratic monsoon this year has again reminded the nation that agriculture continues to be largely rain-fed. Micro-irrigation is the solution and Jain Irrigation is the leader that space. The market acknowledges this fact and rewards the company with premium multiples. That is where my problem starts. My solution to this quandary is to figure out a way to get out with minimal/controlled draw down if growth disappoints in the future.

To guard against precipitous downside, I tested a simple technical rule. I would own the stock only when it is trading above the 20-day moving average. The results (posted below) are somewhat encouraging.


Jain Irrigation Yearly Return Summary Statistics: Jan 1991 to Dec 2008



Jain Irrigation: Jan 1991 to Dec 2008 (Jan 1991 = 100)



Source: Bloomberg