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 are trading well below their intrinsic value, such as during prolonged bear markets.
- A fire sale refers to the selling of a security or other product at a price that is well below market value.
- In the financial market, stocks or other securities are often available at fire-sale prices because the company issuing them is in deep water financially.
- In some cases, an individual stock might be in good shape but is available at a discount because the whole sector that it is part of is under duress.
- Investors that buy stocks at fire-sale prices are counting on them to rebound later, making it crucial to pick stocks of companies that are primed to recover.
- 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
Understanding Fire Sales
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 rest of 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.
Determining Fire-Sale Prices
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.
Fire Sale vs. 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 2007–09 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 fell below historical averages and lingered there. If an investor bought in at that point, thinking they were getting in at fire-sale prices, they may have ended up disappointed, since the sector has not snapped back in the aftermath.
Examples of Fire Sales
Morgan Stanley and Archegos Capital
In March 2021, Morgan Stanley sold $5 billion worth of stock from Archegos' investment positions to a group of hedge funds. Archegos made investment bets in certain U.S. companies and Chinese tech companies that were not going to perform well and were going to result in a large margin call. Morgan Stanley, Archegos' prime broker, decided to offload these positions with the permission of Archegos to a group of hedge funds at a discount so as to avoid a loss on its own books.
Through this overnight sale, Morgan Stanley prevented losses that would have been a direct result of a client's meltdown. Morgan Stanley disclosed to the hedge funds that they would be part of a large margin call that could prevent a client from collapsing. Other banks were not as lucky as Morgan Stanley. Credit Suisse lost $4.7 billion after unwinding Archegos' failed positions.
Warren Buffett and Airline Stocks
A slightly different take on a fire sale is Warren Buffett's sale of airline stocks during the Coronavirus Pandemic in 2020. In 2016, Buffett loaded up on U.S. airline stocks, buying large shares of Delta Airlines, United Airlines, American Airlines, and Southwest Airlines, for a total of approximately $7 billion to $8 billion. When the pandemic hit in 2020 and the world was sent into lockdown and no one was traveling, airline stocks crashed.
Buffett then sold a large portion of his airline stocks at big losses, however, he didn't sell them to get out of what he saw as a doomed industry but rather his motives were altruistic. He sold them so that the airlines could receive government aid without any issues that come with having a billionaire investor with significant control working behind the scenes that would also benefit from the aid.
Advantages and Disadvantages of Fire Sales
The primary advantage of a fire sale for an investor is the ability to scoop up shares at a discount. If an investor's analysis shows that the long-term health of a company is strong despite the drop in price and recent sell-off, it can be a great time to buy stocks with the potential of realizing profits in the future. The disadvantage is that there is a risk of loss if the investor's analysis is wrong and the price keeps falling and never goes up.
Fire sales also present an opportunity for investors to access high-priced stocks. For example, if a stock is trading at $1,000 a share, that might be too rich for some investors. However, if a seller has to urgently offload a large portion of that company's share, knocking its price down significantly, it could be an opportunity for investors to gain access to an otherwise expensive stock.
Purchase stock at a discount
Potential to realize profits if the stock goes up
Ability to access high-priced stocks
Risky investment with uncertainty
Potential to incur losses if the stock continues downward
Fire Sales FAQs
How Long Does a Stock Market Fire Sale Last?
There is no defined time for how long a stock market fire sale lasts. A fire sale can last for hours, days, or weeks. Most often a fire sale of a stock occurs for a few days as investors offload their holdings and as the stock price falls other investors follow suit and offload until the price settles.
What Is a Fire Sale in Real Estate?
A fire sale in real estate refers to homes that are selling at distressed prices. Prices that are significantly lower than what the market value was for them previously and what they were previously purchased for.
The Bottom Line
Fire sales are great opportunities for certain investors to purchase goods or services at discounted prices to either take advantage of low-cost situations or to generate profits in the future. Fire sales are typically harmful to sellers as they sell in a moment of desperation in order to generate cash urgently or to stem further losses.