Are Some Stock Prices Destined to Fall?

Journal of Applied Finance, Spring/Summer 2012, Volume 22, Issue 1, pp. 144-160

Posted: 29 Jul 2012

See all articles by Morris G. Danielson

Morris G. Danielson

Saint Joseph's University - Department of Finance

Amy F. Lipton

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

This paper shows how to quantify the growth expectations underlying a firm’s stock price from its price-to-sales (P/S) ratio. This approach reveals that high P/S firms (e.g., P/S>10) face tremendous growth expectations: they must increase the scale of their operations by a multiple of 10, 20, or more to justify their stock prices. Because typically only the smallest of firms can achieve sales growth of this magnitude, most high P/S firms do not fulfill expectations and suffer steep stock price declines. Many high P/S stocks lose a considerable portion of their value, even after experiencing a period of substantial sales growth. Thus, investors can use the P/S ratio to identify firms with stock prices that are likely to fall, and either avoid or short these stocks.

Keywords: Growth expectation, Stock price, Price-to-sales (P/S) ratio

Suggested Citation

Danielson, Morris G. and Lipton, Amy F., Are Some Stock Prices Destined to Fall? (2012). Journal of Applied Finance, Spring/Summer 2012, Volume 22, Issue 1, pp. 144-160, Available at SSRN: https://ssrn.com/abstract=2119214

Morris G. Danielson (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

Amy F. Lipton

affiliation not provided to SSRN ( email )

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