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; it may now refer to any sale where the seller is in financial distress. In the context of the financial markets, fire sale refers to securities that are trading well below their intrinsic value, such as during prolonged bear markets.
BREAKING DOWN ‘Fire Sale’
Securities that are on “fire sale” may offer compelling risk-reward payoffs for value investors, since further declines in these securities may be limited, while the upside potential could be quite substantial.
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.