Breaking Down the QQQQ
May 18th, 2007 by 
Tom Lyons
Lately, it has been evident that the market is on a one-way trip up. Looking at a three month chart, we see that the Nasdaq 100 (QQQQ) from March 5th to May 17th increased from $42.12 to $46.33, a gain of 10%, a move that corresponded with the broad market rally in stocks over that same time period. Right now though, the QQQQ’s are stalling, as the past two weeks have seen overall sideways movement.
When looking at the top ten holdings in the QQQQ, eight out of the ten are either at or extremely close to their 52 week highs. Amgen (AMGN), a leading biotech, is one of the two companies currently trading near its 52-week low. Having read a lot of articles about AMGN lately, I think Amgen is oversold and will rebound from its current downtrend toward my fair value target of $75 a share. The other stock that is currently trading off of its 52-week high is Google (GOOG). I have written previously how I believe that Google is overvalued; although my fair value estimate is around $410/share, I think that Google’s short-term stock price will follow the direction of the general market.
When looking at top stocks in the Nasdaq 100 that are trading near 52-week highs, a few that stand out are EBay, Microsoft (MSFT), Cisco (CSCO), Comcast (CMCSA), and Oracle (ORCL). Even though these five stocks are trading at or near their 52-week highs, I believe that they are still undervalued relative to cash flows. My price targets for these stocks are as follows: I see relatively large upside in EBAY (worth $39 a share), MSFT ($35 fair value), CSCO ($30.25), and Comcast ($32). I also see lesser upside in ORCL, as I see fair value for that stock as $20.50.
For the remaining companies in the top ten of the QQQQ, I am less optimistic. I think Apple’s (AAPL) fair value is $80 a share, Intel (INTC) is worth $21.50 a share, and QualComm (QCOM) is fairly priced in the $44 area. Given my valuations, I think that the majority of the top ten holdings of the QQQQ (which make up 38% of the index) are currently under priced, with AAPL and GOOG being the only two stocks that I see as being significantly overvalued. I do, however, realize that both of these companies are extremely good at what they do and I would not be surprised if the continue to trade with the premiums that the market has placed on them.
Overall, with the current bullish sentiment amongst investors I think we will continue to see QQQQ move higher. The valuations support many stocks that are currently at or near their 52-week highs continuing to advance, while stocks that have been beaten down like AMGN should see a turnaround and revert closer to their fair values.
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May 18th, 2007 at 3:54 am
Well done, nice job!
It would be even better, if you could post some reasoning why it’s believed some stocks are under/over-valued. I’d love to see something behind.
I am watching WFMI at this time, though no position at this time.
May 18th, 2007 at 7:50 am
While you have nice comments, that is all this summary is until supporting data is provided. You cannot give a FMV of something without a set of qualifying data to support your conclusion.
Once someone can see how you made your case for the FMV’s, for example GOOG ($410), CSCO ($30.25), and INTC ($21.5), they might be more inclined to believe or disagree with your conclusions.
Best of Luck.
May 18th, 2007 at 8:29 am
why did you drop your fair value for Amgen from $85 to $75?
May 18th, 2007 at 11:09 am
anyone can throw out guesses. where is your evidence?
Over and undervalued for what reasons?
May 18th, 2007 at 11:51 am
Looks like QQQQ is at 52 week high (46.95). I think it would go down to $39-41 range in July (week month for tech) due to sector rotation. By the end of the year, Qs will hit $48-50 if earnings continue to be good.
May 18th, 2007 at 12:19 pm
Alex,
I wrote the article saying I value AMGN at $85, Tom’s target comes with more conservative assumptions.
May 18th, 2007 at 5:47 pm
You make some interesting points. It’s hard to determine the market’s current productivity based solely on consumer sentiment; after all, even when consumer spending data indicates lower quarter revenues, those same consumers continue to buy products and stocks that appear cheap relative to prices before the February pullback. I am currently a “defensive bull” in the market, if that doesn’t seem too contradictory. I continue to buy positions in undervalued companies that have NOT run as fast as the April market, while also buying some stocks at 52-week highs and shorting those that are surging unlike their complementing industries. Moreover, I refuse to buy into stocks at lows like Whole Foods and Amgen; although quantitative data supports the fact that they are undervalued and have been misinterpreted, the majority of consumers are scared away from those stocks. I feel that, although unorthodox, consumers are driving the market right now, while the beating-numbers trend is fading.