ISBN: 0-03-031529-8
NEWSWIRE - October 8, 2001
Topic: Equity Valuation
Source: "Investors Without a Compass: Stock-Valuation Models Point in Different Directions," by Jeffrey M. Landerman with David Henry, Business Week, October 8, 2001, pages 36-37.
Synopsis of Article: The article discusses the post September 11, 2001 stock market, arguing that the uncertainty raised by the military, political, and diplomatic maneuvers cannot be quantified into a stock-valuation model. Certainly the events on and subsequent to September 11th have made it more difficult to project the inputs required for a variety of stock valuation models. The article also argues that different valuation techniques currently lead to different estimates of the direction and magnitude of under or over valuation of the U.S. equity markets. Specifically, the dividend discount model estimates that the market is 15% undervalued, the price-to-book model estimates 30% to 40% overvaluation, and the P-E ratio estimates 25% overvaluation. The article provides an opportunity to discuss different types of stock valuation models and to discuss how the events of September 11th impacted the inputs to these models.
Questions:
- What is the Dividend-Discount model (DDM) for valuing stocks? Use the DDM to explain the recent drop in stock prices after September 11, 2001. Why might the model suggest that the market is currently undervalued?
- What is the Price-to-Book model (PBM) for valuing stocks? Use the PBM to explain the recent drop in stock prices after September 11, 2001. Why might the model suggest that the market is currently overvalued?
- What is the P-E Ratio model (PEM) for valuing stocks? Use the PEM to explain the recent drop in stock prices after September 11, 2001. Why might the model suggest that the market is currently overvalued?
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