Are Some Stock Prices Destined to Fall?

18 Pages Posted: 17 Nov 2015

See all articles by Morris G. Danielson

Morris G. Danielson

Saint Joseph's University - Department of Finance

Amy Lipton

St. Joseph's University

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2015

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.

Suggested Citation

Danielson, Morris G. and Lipton, Amy, Are Some Stock Prices Destined to Fall? (November 13, 2015). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 22, No. 1, 2012, Available at SSRN: https://ssrn.com/abstract=2690264

Morris G. Danielson (Contact Author)

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

Philadelphia, PA 19131
United States

Amy Lipton

St. Joseph's University ( email )

5600 City Avenue,
Philadelphia, PA 19131
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
214
Abstract Views
983
rank
169,185
PlumX Metrics