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While I am not a fan of getting caught up in euphorias, I do like to find some value in them. As we all know, the exchanges have been hot stocks to own this year, as Nymex (NYSE: NMX) showed on its first day of trade last week. I already own NYSE Group (NYSE: NYX) for the MIR 2 and the Cramer Strategy.

In addition to value, I also like a stock that is showing some improving trends. Further, I like when the stock directly correlates with a market that I think is in breakout mode. Finally, I think that if a key deal goes through (and it appears that way) for the name, the stock has more upside than the market has priced into it. So buying the Nasdaq Stock Market (NASD: NDAQ) to me seems like a no brainer.

NDAQ has been stalled for a bunch of reasons this year. The purchase of the London Stock exchange has been a battle. The Nasdaq index itself (NDX and COMP) was a drag for quite a while (and as one tech company after another warns, it becomes even more of a drag). And perhaps the lack of derivatives exposure has held the name back versus the big moves in the Chicago Merc (NYSE: CME), Chicago Board (NYSE: CBOT) and the aforementioned Nymex. But I think that is about to change. With the NYX attracting a solid bid, I think it is time for NDAQ to get at least back to its previous range, up near $45 per share and join this domestic exchange rally.

Fundamental Story
The story of NDAQ is about undervaluation. It is trading very cheap to its forward growth rate. On average, analysts are looking for .76/share in 2006 and $1.54/share in 2007. I think they can beat both of those estimates. Further, the stock, based on these numbers, is trading at only a quarter of its PE on a forward growth basis (vs. the NYX which is trading at 1.05x forward growth).
Nasdaq pic
While I am not expecting NDAQ to trade up to 1.05x growth (the LSE story is an overhang here along with leverage), I do expect to see the stock at least trade up to a PEG of .35 which implies a value of roughly $55/share. In addition, if one takes into account the accretion that can occur with the LSE deal to earnings in 2007/2008, the stock begins to look even cheaper.

Economic Impact
NDAQ is obviously affected by economic acceleration and deceleration. If the economy is expanding, technology stocks and speculation tends to rise within the Nasdaq names leading to greater transaction amounts (and, in turn, revenues) for NDAQ. With the recent breakout in the Nasdaq 100, speculation has picked up in the tech sector (though one could say that this level of speculation increased prior to the break). If the economy improves, this should improve the revenue streams of NDAQ. In buying the LSE, they are diversifying the portfolio with a Premier name in the European listing market. This will also diversify country exposure and lower economic risk in the process.

Sentiment
Sentiment is not as supportive in NDAQ as it has been in other names I have purchased. From Yahoo! Finance, the average rating is under 2 and all the recent market calls have been overweight’s or buys. In addition, this reminds me of a situation like Cisco (NASDAQ:CSCO) which had a plethora of buy ratings on it but the price of the stock did not move. As for the market, the level of short interest sits at 7.35% (from shortsqueeze.com) which to me is supportive for a good move higher (as the shorts get squeezed and run for the hills). While the fundamentals and the economics are supportive to NDAQ, I would say that the sentiment is partially bullish.

Technicals
NDAQ has been bouncing higher ever since making a low a few months ago (inline with the Nasdaq 100). Supporting this move higher as been the accumulation which has been rising as buying pressure improves. The DM buying pressure currently sits at the midline so if the market steps in and buys this name like I expect, the indicator should begin to support the bulls more convincingly. In terms of the weekly chart, the power index is bullish though not exactly screaming higher. As mentioned, the NDAQ has been tracking the NDX 100 so I expect NDAQ to find support by the breakout in the index and that provides added support to this bullish case.

Summary
NDAQ is a story that should benefit from the rising markets over the next month (as the rally continues). The stock is undervalued versus its peers and only needs one short squeeze to get things going in my opinion. While I am not looking for tremendous gains, due to the LSE overhang, I think this stock can trade to the previous range high around $47. A break from there and $60 becomes possible. Thus, I am a buyer of NDAQ today.

NDAQ 1.5 yr chart:

NDAQ 21 11 06

Source: The Long Case for NDAQ