WFU Law School
Law & Valuation
5.3.2 Comparable Private Company Sales

5.3.3 Valuation in the "New Economy"

There has been significant recent discussion about valuing stocks in the high-tech New Economy. How can a company like, with no actual earnings according to its financial statements and continuing paper losses, be valued at tens of billions of dollars? Or how can the whole stock market be trading at a P/E of 40, when traditionally over the last fifty years market P/E has been between 10 and 15? Consider these responses:
  • Irrational Exuberance by Robert J. Shiller: An unprecedented increase just before the start of the new millennium has brought the market to this great height. The Dow Jones Industrial Average (from here on, the Dow for short) stood at around 3,600 in early 1994. By 1999, it had passed 11,000, more than tripling in five years, a total increase in stock market prices of over 200%. At the start of 2000, the Dow passed 11,700. However, over the same period, basic economic indicators did not come close to tripling. U.S. personal income and gross domestic product rose less than 30%, and almost half of this increase was due to inflation. Corporate profits rose less than 60%, and that from a temporary recession-depressed base. Viewed in the light of these figures, the stock price increase appears unwarranted and, certainly by historical standards, unlikely to persist.
  • Valuation and the New Economy by Matthew R. Crow (Mercer Capital): Some companies just aren't ready for the Capital Asset Pricing Model. Most securities analysts are trained like short order cooks to examine a company's earnings stream, apply a multiple, get an answer, and get on to the next one. Value equals earnings times a P/E ratio. Certain ranges of earnings multiples and cash flow multiples are taught as being almost universal. Just like everyone likes bacon and eggs, everyone thinks six to eight times EBITDA is reasonable.
  • Overvalued? Stocks' Price Is Finally Right by Michael Edesess: But isn't it possible that historic market levels were too low? In the past, the information investors needed to assess the value of an investment was far less readily available than it is today. Investments may, as a result, have seemed more risky than they really were. Investors may have been too cautious to anticipate the high corporate earnings growth rates that subsequently came to pass.

Back to the Future


NEW YORK -- Federal investigators have arrested an enigmatic Wall Street wiz on insider-trading charges -- and incredibly, he claims to be a time-traveler from the year 2256!

Sources at the Security and Exchange Commission confirm that 44-year-old Andrew Carlssin offered the bizarre explanation for his uncanny success in the stock market after being led off in handcuffs on January 28.

"We don't believe this guy's story -- he's either a lunatic or a pathological liar," says an SEC insider.

"But the fact is, with an initial investment of only $800, in two weeks' time he had a portfolio valued at over $350 million. Every trade he made capitalized on unexpected business developments, which simply can't be pure luck.

"The only way he could pull it off is with illegal inside information. He's going to sit in a jail cell on Rikers Island until he agrees to give up his sources."

The past year of nose-diving stock prices has left most investors crying in their beer. So when Carlssin made a flurry of 126 high-risk trades and came out the winner every time, it raised the eyebrows of Wall Street watchdogs.

"If a company's stock rose due to a merger or technological breakthrough that was supposed to be secret, Mr. Carlssin somehow knew about it in advance," says the SEC source close to the hush-hush, ongoing investigation.

When investigators hauled Carlssin in for questioning, they got more than they bargained for: A mind-boggling four-hour confession.

Carlssin declared that he had traveled back in time from over 200 years in the future, when it is common knowledge that our era experienced one of the worst stock plunges in history. Yet anyone armed with knowledge of the handful of stocks destined to go through the roof could make a fortune.

"It was just too tempting to resist," Carlssin allegedly said in his videotaped confession. "I had planned to make it look natural, you know, lose a little here and there so it doesn't look too perfect. But I just got caught in the moment."

In a bid for leniency, Carlssin has reportedly offered to divulge "historical facts" such as the whereabouts of Osama Bin Laden and a cure for AIDS.

All he wants is to be allowed to return to the future in his "time craft."

However, he refuses to reveal the location of the machine or discuss how it works, supposedly out of fear the technology could "fall into the wrong hands."

Officials are quite confident the "time-traveler's" claims are bogus. Yet the SEC source admits, "No one can find any record of any Andrew Carlssin existing anywhere before December 2002."

Weekly World News will continue to follow this story as it unfolds. Keep watching for further developments.

5.3.2 Comparable Private Company Sales

©2003 Professor Alan R. Palmiter

This page was last updated on: August 4, 2003