The price of a stock essentially incorporates estimates for the next 10 years of earnings present valued with a discount multiple attached. What that means is that the long term
return potential to shareholders ultimately is more important than current events that tend to create some volatility in the stock price in the near term.
What large investors look for are strategic points to enter and start building positions in order to capture that potential return. When the stock has appreciated to the top end of the projected price range, managers will start reducing exposure and rotate into stocks that indicate much greater upside potential appreciation. It should be noted that not all stocks are high and low at the same time.
Had a user followed our hypothetical portfolio of 25-30 large stocks as evaluated in our monthly newsetter, choosing 15 stocks at a time beginning after the market decline in nearly 2020 until mid 2022 would have potentially netted a 52% return vs the S&P's 28%. This outperformance is largely due to missing the large market decline in the early to mid 2022 period as our work showed how overvalued most stocks were and their large downside risk.
As I write this in 3Q 2022, the market is looking extremely attractive with upside potential in the majority of the 26 stocks we are tracking with significant upside 12-18 months out...with some as large as 50-80+%. The market always looks out 6 months or more and has already incorporated much of the current negative issues including higher interest rates, inflation, economic risk and supply chain issues. Soon we will potentially get input from CEO's looking into a more positive environment in 2023. Stocks will have moved up before that happens as they anticipate some improvement in the operating environment.
We believe investors would do well to be contrarians and to focus on valuation ranges in order to capture available spreads. See our monthly newsletter and coming software to be able to decifer in advance where these ranges are likely to be based on fundamental valuation.