What is a Fire Sale
A fire sale consists of selling goods or assets at heavily discounted prices. Fire sale originally referred to the discount sale of goods that were damaged by fire. Now it more commonly refers to any sale where the seller is in financial distress. In the context of the financial markets, a fire sale refers to a situation where securities that are trading well below their intrinsic value, such as during prolonged bear markets.
BREAKING DOWN Fire Sale
A fire sale can be an opportunity for investors. Securities that are on fire sale may offer compelling risk-reward payoffs for value investors, since further declines in these securities may be limited and the upside potential could be quite substantial. The challenge for investors is making the decision to purchase securities during a fire sale. When the market is having a fire sale on stocks, for example, it means that the overall market sentiment is that it is a bad time to own stocks. Buying when the market is selling requires investors to have a contrarian streak in them. A broad fire sale of stocks is rare, however, and usually only occurs during times of financial crisis. More commonly a particular sector like healthcare stocks or oil and gas services will see a fire sale due to some broad news that negatively affects that sector.
While there are no fixed valuation metrics that indicate when a stock is trading at a fire sale price, it may be considered to be at such a price when it is trading at valuations that are at multi-year lows. For example, a stock that has consistently traded at an earnings multiple of 15 could be at a fire sale price if it is trading at an earnings multiple of 8. Of course, this assumes that the business fundamentals for the stock are still relatively unchanged and have not deteriorated markedly.
A Fire Sale Versus a Sector Wide Correction
A fire sale is generally seen as a buying opportunity by investors taking a historical perspective. For example, some of the best deals in a generation came in the depths of the 2008-09 financial crisis where solid banking and consumer stocks dropped well below their historical valuation. There is, however, a real risk that a fire sale may be the result of a sector wide correction that will be long lasting and perhaps even permanent. The oil price collapse of 2014 is an example where many stocks directly in oil extraction or heavily leveraged to it have fallen below historical averages and lingered there. So the fire sale in 2014 and 2015 hasn't proven to be such a great deal for investors who bought in.