NEWSWIRE - October 17, 2000

Topic: Stocks and Their Valuation

Source: "Reality Check: Here are Six Myths that Drove the Boom in Technology Stocks," by E.S. Browning and Greg Ip, Wall Street Journal, Monday, October 16, 2000, page A1.

Synopsis of Article: The article discusses the rise and fall of technology stock prices over the past two years. It points out that the Dow Jones Industrial Average rose 200% from 1994 to its peak in January, while the Nasdaq Composite Index rose 571% to its peak in March. More recently, the Dow is down 11% this year, while the Nasdaq is down 34% from its high. Many well-known technology companies are down significantly, for example, Dell is down 54% from its peak this year, Microsoft is down 55%, Intel is down 47%, and Lucent is down 72%. The six myths discussed relate to the sustainability of earnings gains, the relationship between technology companies and the economy, the sustainability of monopoly power, the potential for growth of the Internet, the importance of generating earnings, and that this time things are different. The article provides an opportunity to discuss stock valuation, how many of the old rules of stock valuation were being dismissed in a new economy with a rapidly rising stock market, and how maybe the old rules are coming back into favor given the recent drop in technology stock prices.

Questions:

1. What determines the value of a stock?

2. One myth discussed in the article is that technology companies can generate breathtaking gains in earnings, sales, and productivity for years to come. How does this lead to possible overvaluation?

3. Another myth is that technology companies are not subject to ordinary economic forces such as a slower economy and rising interest rates. How does this lead to possible overvaluation?