In FY21, Mazagon Dock Shipbuilders had 8,000 Cr in cash while its market cap was only around 4,000 Cr. Since then, the market cap has soared past 1 lakh Cr. A similar story played out with Prestige Estates when the real estate cycle turned—stock zoomed nearly 10x. The same pattern can be seen in other winners like Vinati Organics, Page Industries, Varun Beverages, and many more.
I was discussing this with a friend, and he said: “The game is all about narratives, narratives, and narratives.” When the narrative around a company or sector improves, the PE rerates—and that’s when fat money can be made.But here’s my struggle:
How do you catch a stock before the narrative shifts and becomes favorable?I couldn’t find a thread on ValuePickr discussing this in detail, so I’m starting one myself. If you’ve ever managed to identify a company before the narrative changed, could you please share what led you to invest in it? What signals or patterns helped you sense the upcoming shift?Looking forward to your insights. Thank you in advance!
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Very well said @randomquarks!
Even some industries such as IT, where earnings are depressed due to political uncertainty in the US are still not dipping below their historical PE averages.
It is almost impossible to find value right now - I think funds such as PPFAS and MOST have the right idea by keeping 20-30% in cash for now.
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There are times when going is not good for both the industry in which a company is operating and then company itself is not performing well. In such a situation, even when all the ratios are favorable to purchase, people with limited resource wouldn’t take the bet that in future such company’s price goes up. However, if one is able to foresee considerable growth in a particular sector and then chose the best stock with the financial parameters, one can see multibagger retruns in such cases for eg BSE & CDSL from 2021 onwards, all the defense related stocks from 2021 onwards. Both these sectors still have long way to go & in next 3-5 years, this sector will churn out superb profits thereby fantastic returns too. So to conclude, one has to be on top of the sectors which will be a growth sector for the next 3-5 years which will ensure multibagger returns during these periods.
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As per my observations, mostly knowing which sectors will create multi-baggers is not that easy even if it sounds so.
Way back in 2020 No expert has highlighted that, Retail equity investing will grow by multiple times. It is only in the hindsight that, now few analysts are talking about it.
Same is applicable to Defence sector. Very few experts were recommending BUY on stocks like Bharat Electronics or HAL in 2018-19-20 when these stocks were available at P/E of 10-20.
Returns are always in the hindsight and Risk is in the journey. Which retail investors had the courage to invest 5% or 6% in Defence sector in 2018-19. I think, it would be hardly few ones.
For most of the investors, even if they stick to simple Value investing i.e. buying stocks when those are undervalued is sufficient criteria to generate very good returns.
I am not suggesting that, we should not look for future multibagger generating sectors at all, but it is not as simple as it sounds!!
Today we may feel that, EV could be the next sector in which 5-10-15 baggers will be generated but we may get it completely wrong after 3 years and it could be a surprise sector which might have generated the multibaggers.. Instead of this, if you invest in some undervalued stock, it may throw surprise returns. Just a thought.
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You/your friend is correct. In long term stock prices follow earnings. But in short/medium term, sentiment (PE) is as much important than actual earnings. Reason why PE re-rates or de-rates is anticipation of future. If looking only at financials and deciding to Buy/Sell was the game then we wouldn’t have required so many high paying fund managers in this business 
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Now coming to how to detect sentiments. This concept is called as Relative Strenth (RS). You can check in sites like Trendlyne, Marketsmith, Strike money etc. Here you will get idea which company/industry/sector is underperforming/outperforming w.r.t. selected benchmark. But always be careful as only looking at sentiments and buying/selling then you will be doing trading and not investment. Leverage this concept and do fundamental study if you are doing investment.
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One sure shot way of not making money is to sit on the sidelines waiting for the “home run” i.e. crises like a COVID.
A much better approach is to keep some % of investable money in liquid funds which can be deployed in equities when a crisis like COVID hits and valuations become extremely attractive.
As for turnarounds (changes in narrative), there can be 2 types: one driven by a specific business underperforming in an otherwise attractive sector due to poor quality of management/promoters like we saw in the case of Yes Bank/DHFLs etc. in such cases, times can change if a new management or a promoter with a great history of operating in the same or a peripheral segment and an excellent capital buffer comes in. A recent example of this could be Japan’s Sumitomo Group coming in Yes bank or Dabur group bidding for Religare Enterprises. (No recommendation here; I’m not invested in any of these companies)
Second type could be when the sector as a whole is cyclical and is going through a tough phase currently but the cycle is likely to turn sometime soon.
You can track this kind of turnaround through improvement in sequential and YoY Operating Profit margins of companies operating in the sector. You can also see this change in narrative reflecting in mgmt commentary; neither of these 2 metrics should be looked at in isolation - especially mgmt are usually bullish in their guidance for future even when actual turnaround may be some time away.
My recommendation is to allocate only a small portion of your portfolio to such potential turnaround opportunities as it’s extremely hard to know for sure if a turnaround will actually play out in your favour. Better to look for sure shot opportunities which are already on their way up. You might enter a little late but you will sleep better! 
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It’s a wonderful topic for discussion. Most home grown buffets who claim to have the ability to identify stocks where the narrative was set up to change, essentially have an insider view on it. This is what gives them the conviction to put their deep bets on it. And make fat money.
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100% the case. I won’t name names but most Bombay and Cacutta based people who made money in 80s and early 90s(before the SEBI) in equity markets and today have 1000s of crores did so with insider trading. In any case, that kind of money is not possible anymore.
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