Are Some Stock Prices Destined to Fall?
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, defined as firms in the top 5 percent when ranked by P/S (P/S > 12.2), face tremendous growth expectations. These firms 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 high (but not high enough) 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.
Danielson, Morris G., and Amy F. Lipton. "Are Some Stock Prices Destined To Fall?" Journal Of Applied Finance 22.1 (2012): 145-161.
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