Introduction
A fire sale consists of selling highly discounted rates of products or properties. Fire sale initially referred to the discount selling of fire-damaged goods. Now, it applies more generally to any sale where the seller is in financial distress. In the sense of the financial market, a fire sale refers to a circumstance where shares trade well below their fair value, for instance, during prolonged bear markets.
Understanding
A fire sale can give investors a chance. Securities that are on fire sale provide compelling value investor risk-reward payoffs as more declines in such securities may be minimal, and the upside potential may be very significant. Investors are forced to decide to purchase shares during a fire sale.
For example, when the market has a fire sale on stocks, it means the general market perception is that owning stocks is a wrong time. Buying when the rest of the market is selling requires investors to have an antagonistic streak in it. However, a large selling of stocks by fire is uncommon and typically happens only during times of financial crisis.
More commonly, particular sectors, such as healthcare stocks or oil and gas services, will see a fire sale due to the news that negatively affects the industry.
Fire Sale Prices
Although there are no fixed valuation indicators that show when a stock trades at a fire sales price when it trades at multi-year lows, it can be considered to be at such a price. For example, a stock that has regularly traded at an earnings multiple of 15 is trading on an earnings multiple of 8 may be at a fire sale price. This implies, of course, that the company conditions for the stock are still mostly intact and have not significantly deteriorated.
