When it comes to stocks, it’s all about expectations. In theory, the present value of a stock is equal to the company’s earnings power, discounted back at an appropriate rate. In practice, this basically means that the more optimistic investors are about the future growth of a company, the higher that stock will go, and vice versa.
One feature of the expectations game in stocks is that expectations end up being correlated with potential return. The bigger expectations are for a company, the more those positive expectations get priced into the stock, so when good news happens, everyone was ready for it, and the stock consequently fails to rally in a big way.
But, when the expectations are low on a company, good news isn’t priced in. Thus, when good news converges on a depressed stock, that’s when you get the big 20%-plus, 30%-plus, and bigger rallies.