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There's no magic formula, but there are a few recurring signs that show up again and again before sharp price corrections.
When a stock's earnings multiple expands much faster than its actual earnings growth rate, that's a sign the market has already priced in a particularly optimistic future — a gap that requires the future to play out exactly as expected, with no room for error.
A company reporting revenue and accounting-earnings growth while its free cash flow doesn't grow at the same pace (or stays negative) — a gap between 'paper profit' and real cash is a classic red flag.
A DCF model that requires an especially high growth rate for many years to justify the current price (see How to Tell If a Stock Is Overvalued — A Practical Framework) is itself an indicator — the further the required assumption sits from the sector's historical average, the higher the risk.
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This research is intended for general educational purposes only, does not constitute investment advice, and is not a prediction. Full details on the disclaimer page.