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:
- What determines the value of a stock?
- 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?
- 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?
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