Value investors, and the long strategies of hedge funds, will screen for companies whose current price is well below their estimate of intrinsic value. The short component of a hedge fund strategy will do the opposite: they will short firms whose market price is well above intrinsic value.
How and Why Events Affect Prices
If a company’s value is—optimistically—the present value of all of its future cash flows, then new information that changes expectations about those cash flows will change stock prices.
If most trades occur when the buyer has a different view of the stock’s value than the seller, then the receipt of value-relevant news presents an opportunity. If negative news about a company occurs, ...