Every few months I like to put the top 10 holdings for the QQQQ into a DCF model to get an idea on the valuation of the QQQQ. The top ten holdings make up 40.84% of the total holdings in the QQQQ, so they can serve as a useful proxy to establish a valuation. The following valuations were derived by using each company’s five year annualized growth estimate and a moderate exit multiple, generally in the mid- to upper teens

-Apple (AAPL) makes up 8.98% of the QQQQ. My valuation places AAPL as being worth $131/share, so with AAPL currently trading near $168, the stock looks overvalued by about 22%.

-Microsoft (MSFT) makes up 5.92% of the QQQQ. My target value is $32.90/share. MSFT is currently trading at $30.10, or 9.3% below my target price.

-Qualcomm (QCOM) makes up 5.32% of the QQQQ. I value the stock at $52.65/share. QCOM is currently trading at $42.65, leaving 23.5% upside potential given the difference between my value and the market’s.

-Google (GOOG) makes up 4.49% of the QQQQ. GOOG is currently trading at $615, and I value the stock at $492/share, 18% below its current market price.

-Cisco (CSCO) makes up 3.68% of the QQQQ, and having closed at $33.08 today there is essentially no difference between its price and my value estimate of $33.

-Intel (INTC) makes up 2.95% of the QQQQ. I value the company at $27/share. INTC closed trading at $25.84, leaving a 4.5% upside difference between my price and the current market price.

-Gilead (GILD) also makes up 2.95% of the QQQQ. GILD is currently trading at $42.09, and I value the stock at $45.70/share or 8.5% above the most recent close.

-Oracle (ORCL) makes up 2.58% of the QQQQ. My valuation pegs ORCL at $26.30/share, meaning the acquisitive company may have significant upside as it trades at $22.52, or 14.5% below my estimate of the company’s worth.

-Comcast (CMCSA) makes up 2.48% of the QQQQ. The stock closed at $23.90 today, just short of my value of $24/share.

-Research in Motion (RIMM) makes up 2.27% of the QQQQ. With RIMM currently trading at $115.52,
I value RIMM at $81/share, or -31% below today’s close.

When looking at the values of the major holdings in the QQQQ, there is a similar trend as has been present over the last few months. GOOG and AAPL are overvalued based off of the DCF model pricing, but given the high growth and investor sentiment it is unlikely for these to stocks to see any major corrections. RIMM is riding a huge wave of momentum, and I feel it is overvalued and most likely will experience a correction in the coming months. The rest of the top 10 look reasonably priced or undervalued and should start to move towards their fair values. Given these numbers, I think that the top 10 of the QQQQ backs up my thesis from last week that the market will not experience a downturn anytime soon and should be able to continue its recent success.

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