In the 1990s the global stock market experienced the birth of the new technology sector and an
extraordinary increase in values. However the surge of stock values came to an end in 2000
when stock markets dropped significantly. Especially the technology sector suffered greatly
and a high amount of wealth was erased by sharply falling markets. Could it have been possible
to predict stock prices in such a market environment and therefore enable the equity investor
to invest in undervalued stocks if there were any? The key question for an investor in this
context is whether an investment is fairly priced at the time of investment. This is of
importance if one believes that stock prices can be overvalued or undervalued at times but
adjust to their true values in the long-term. To form an opinion on whether an investment is
fairly priced or not i.e. overvalued or undervalued an investor needs a valuation model. Such
a model provides a theoretically correct value which can be used as a benchmark for the
decision. In her study Sussane Hakuba examines the forecasting capability of two selected
valuation models for long-term equity investments over a nine-quarter time horizon (from the
4th quarter of 1999 to the 4th quarter of 2000): a) the two-stage free cash flow to equity
(FCFE) model andb) the dividend discount model (DDM) as applied by JPMorgan Fleming. Susanne
Hakuba looks at the application of the two equity valuation models analyzed including theory on
the models their inputs and assumptions made. In addition she provides discussion of the
stock valuations performed and comes to conclusions and recommendations for future valuations
applying the models examined.
