With the market continuing its way up I wanted to check back in on my recommendation to buy the QQQQ. I originally made this call on May 18th, 2007 when the QQQQ was trading at $46.33. My rationale for buying the QQQQ at the time was the out of the top ten holdings (comprising nearly 40% of the index) the majority were currently undervalued. As the QQQQ continued to show strength over the next two weeks, I again wrote that the valuation justified a higher price.

Now, with the QQQQ breaking above $50.00 today during intraday trading and eventually closing at $50.23, I want to reexamine the top ten holdings. Using the ten stocks that we originally examined to find fair market value (GOOG, AAPL, AMGN, QCOM, ORCL, MSFT, INTC, CMCSA, CSCO, and EBAY) we found 7 out of 10 are currently at or over the fair market value numbers posted in my original article, none of which have materially changed. In afterhours trading today, the QQQQ traded back below $50.00 on news from Intel’s latest quarter that disappointed investors. I think these two factors (elevated valuations and a catalyst that serves immediate reason to take money off the table) combine to tell us that now is the time to sell out of the QQQQ.

One change to the QQQQ Top 10 holdings since the original article was posted is that EBAY has been replaced by Gilead Sciences (GILD). Doing a quick cash flow valuation, I established a target price of $48 dollars a share, or upside of around 22% for that stock. GILD, along with a few of the other stocks in the top ten holdings, still remain undervalued, and it is because of this I am not recommending going short the entire QQQQ - rather, I believe the diligent course is to simply cut back on any long positions as the market seems ready to retrace some of its recent gains.

A Recap of the QQQQ Top 10 Fair Value Prices:

AAPL - $85 (-39%)
AMGN - $75 (+35%)
CMCSA - $32 (+14%)
CSCO - $31 (+4%)
GILD - $48 (+22%)
GOOG - $430 (-22.5%)
INTC - $20 (-24%)
MSFT - $35 (+13.5%)
ORCL - $20.50 (negligible)
QCOM - $44 (-2%)

The bottom line: the tech-heavy Nasdaq justifiably had room to run over the past two months, but this rally has taken too many stocks too far. While there are still values to be found, this is no time to be overextended into many stocks. Strongly consider switching out of QQQQ and related ETFs and either into cheap individual stocks (perhaps on a healthcare theme given the cheap valuations on stocks like AMGN, GILD, Quest Diagnostic - DGX - and Johnson & Johnson - JNJ) or a more defensive fund.