Example of a company at an inflection point - check my post on the APL Apollo Tubes thread, other than this and Sanghvi Movers I haven't seen a huge delta coming through for any of the stocks I own. A basic question I ask myself -
Is demand for the business capex based or capacity utilization based? If the former you will have a business that will grow in spurts, else we have a secular business. A business that grows in spurts has a better chance of having a medium term future very different from the recent past if the demand environment is getting better and the effects of operating/financial leverage can play out in unison. However timing becomes important in such stories
As for how a quantitative model can catch such stories, this is what has worked for me. I have a DCF mindset to visualize how the financials can change if things were to get better. As for valuation I would swear by the reverse DCF method where you start with CMP and try to see what expectations are being priced into the stock. For e.g when I invested in APL Apollo in 2014 my analysis told me that the CMP was discounting a 11-12% growth in earnings and cash flow while I was fairly confident that the company would grow in excess of 25% once the commodity cycle had played out. To me the sacrosanct point is the difference between what is being priced and what I think the business can do
Applying Mauboussin fundas - my whole perspective on how long the DCF model period needs to be is driven off his fundas. If one invests with a 5 year horizon, it will be meaningless to consider a model horizon of < 6 years and too optimistic to model for > 10 years unless one believes the franchise component is very strong for the business. The link between ROIC, DCF period and implied growth rate is covered brilliantly in some of his notes.
I also use another simple framework of his to see if I am consistent in my buy execution -
Price momentum - Strong/Steady/Weak
Quality of the Business - Wide Moat/Narrow Moat (driven off the Morningstar framework)
Valuation - Cheap/Fair/Expensive
Re rating stage - Early/Underway/Over
Earnings Momentum - Strong/Steady/Weak
Obviously one wants to enter when price momentum is strong (6-12M), quality makes the cut, valuation is cheap, re rating is underway and earnings momentum is getting better.
If one is holding a story where price momentum is very strong, Quality makes the cut, valuation looks expensive (priced in for positives) and re rating stage is late then any drop in earnings momentum can hammer the stock price (look at Cera Sanitary through H2 last CY)