The huge run-up in the price of biotech stocks in the past year has many investors – and even Fed Chair Janet Yellen – wondering if the rally has legs. Not to worry, said Todd Rosenbluth, Director of ETF & Mutual Fund Research at S&P CapitalIQ. ‘We still have a lot of buy or strong buy recommendations on biotechnology companies,’ said Rosenbluth. ‘We think that the larger cap companies are still trading at a discounted PE multiple to the broader market and to the healthcare sector and they also have stronger catalysts.’ Biotechnology was the best performing sub-industry, up 289% from 2011to 2014, ahead of the S&P Health Care Sector and the broader S&P 1500 indices gains of 118% and 64%, respectively. Nearly a year ago, Yellen famously warned of ‘substantially stretched’ valuations in biotech, as well as social media stocks. In terms of valuation, Rosenbluth pointed out that biotech is not expensive relative to the broader market. He cited that the S&P 1500 Biotechnology Industry trades at forward P/Es of 18.2X (2015) and 15.2X (2016), well below the health care sector’s 19.3X and 16.5X and the broader S&P 1500 index’s multiples of 18.4X and 15.9X.
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