When a high-profile growth stock crashes 70-90%+ — driven by genuine execution failure, over-valuation unwind, or both — the investor base that gets burned largely exits. Even after a successful restructuring that restores or exceeds prior growth and profitability, the stock trades at a persistent discount versus its fundamental trajectory. The mechanism: skeptics who replaced believers set the marginal price, model-builders haven't rebuilt trust, and capital allocators treat it as a "show me" story requiring 2-3 years of clean execution before re-rating.
When screening for mispriced growth: flag companies with prior 70%+ crashes that have since delivered 2+ years of clean execution and restored fundamentals. The "scar tissue" discount is a sentiment artifact, not a fundamental one — it creates a window where the stock is objectively cheap by any FCF/revenue/earnings multiple but the market price hasn't caught up. Key signals to look for: (1) multiple compression far in excess of growth rate slowdown, (2) wide analyst target vs. market price gap, (3) management credibility restored via 2+ guidance beats. Risk: sometimes the discount persists because the market is right — there's a latent risk the model hasn't identified. Validate that the operational turnaround is structural, not cyclical, before attributing the gap purely to scar tissue.