Most stock discussions get stuck on the wrong question.
People argue over whether a company is good, whether the product is real, whether the CEO is smart, whether the market is large, whether the brand is strong. Those things matter, but they are usually not the actual trade.
The actual trade is whether the current price already assumes all of that.
A great company can still be a bad stock if the market is already pricing in clean execution, strong margins, no real competitive pressure, and years of growth with no major reset. A mediocre company can still work as a stock if expectations are low enough and the business only needs to stop getting worse.
That is why some of the most annoying-looking stocks keep grinding higher, while some obvious "quality" names go nowhere for years. The market is not grading companies like a school assignment. It is constantly comparing expectations against future evidence.
The harder part is that "priced in" is not just about valuation multiples. It is also about narrative.
Sometimes the market is pricing in a product cycle. Sometimes it is pricing in rate cuts. Sometimes it is pricing in margin expansion. Sometimes it is pricing in a turnaround that has not actually happened yet. The stock does not need the company to be good. It needs the company to be better than the version investors already paid for.
That is the filter that usually saves the most time:
If the business does well, does the stock still have room to re-rate?
If the business does only fine, how much downside is there?
If the popular narrative breaks, what part of the valuation disappears first?
That is the part that seems under-discussed. A lot of people are not really bullish on a stock. They are bullish on the company and skipping the second half of the question.
What are the clearest examples right now of "good company, bad stock" or "ugly company, interesting stock"? Curious where people think the market is already pricing the story too cleanly.
A lot of stock debates are really just arguments about what is already priced in
byu/Big-Bit-123 ininvesting
Posted by Big-Bit-123
1 Comment
“It is also about narrative.”
IMHO, the market for much of the last 5-6 years has become escalator up, elevator down. Escalator up is “price to narrative”, month after month of “growth stocks only go up”, followed by the “elevator down” (price to earnings back in a hurry, people have gone 110% risk-on so no more room to dial up popular stocks, which get dumped.)
The frustration that some people have is that they continue to look at fundamentals in a traditional sense, when what works and has continued to work are the most exciting narratives. On the growth investing side, the issue becomes people start “this time is different”-ing and rather than view extraordinary gains as unsustainable, they pile on and by the time the rug pull happens (last Spring, this Spring, 2022), they’re 110% loaded up on this stuff thinking that the rate of gains will continue indefinitely, leaving themselves no room to dial up into the decline.
Additionally, what’s doing well does so well that it feels like the popular stocks have pulled in who would be buyers for things that are having an issue. It continues to be a market of anything popular with an exciting narrative is a pile on and expensive gets more expensive, but anything with a headwind/issue is sold and then sold some more – cheap gets cheaper. Occasionally, the ignored names find buyers in a rotation but even that feels like people are renting them while deciding when to run back to growth.
We’ve had a number of “resets” before growth takes off again, but at some point it would not surprise me if there was a decline where the expected insta-v shaped recovery doesn’t materialize. Still wouldn’t surprise me if 5 years from now people who are new to investing are envious of those who were able to take advantage during this period. Additionally, I thnk the last 5 years or so has created unreasonable expectations for many – people acting like a 10% decline is apocalyptic when it used to be viewed as a healthy correction. Not being bearish, just IMHO realistic – this has been an extraordinary half decade for growth investing but it’s not going to continue at this rate indefinitely.