If you own shares of biotechnology stocks, chances are you’re having a great 2015.
Seventeen of the top 20 performing stocks with a market capitalization over $300 million are biotech or pharmaceutical stocks. The chart below shows the incredible year-to-date performance of these stocks. It also makes me worry about a biotech bubble.
Even if you look at a much more diversified slice of the biotechnology market, you’ll see that the major biotech ETFs are significantly outperforming their Nasdaq Composite benchmark.
The chart below shows the year-to-date performance of the major biotech ETFs. The largest and most popular are the iShares Nasdaq Biotechnology Index Fund (NASDAQ: IBB), the SPDR S&P Biotech Fund (NYSEArca:XBI) and the First Trust AMEX Biotechnology Index Fund (NYSEArca: FBT).
Note that the Nasdaq Composite is up 5.5% so far this year.
This group of stocks has been hot for quite some time. Zooming out to look at a full year of price performance, you can see that the Nasdaq Composite – the lonely green line in the chart below – is significantly lagging behind the three major biotech ETFs.
Source: Google Finance
Looking even further back, you’ll see that the most popular of these biotech ETFs, the iShares Nasdaq Biotechnology Index Fund, is up 240% since the beginning of 2012.
Individual biotechnology stocks are also leaving the Nasdaq Composite in the dust. The chart below shows the one-year performance of Celgene (NASDAQ: CELG), Biogen (NASDAQ: BIIB), Gilead (NASDAQ: GILD) and Amgen (NASDAQ: AMGN). These are large multinational biotech companies with a market capitalization in excess of roughly $100 billion – not little known small-cap stocks seen on the year-to-date performance chart at the top of this article.
Source: Google Finance
Is this sustainable? Or are we looking at a biotech bubble?
Interestingly, the P/E ratios for some of these stocks aren’t outrageous. For example, Gilead trades at a very reasonable 13.81 times earnings. Amgen trades at a P/E ratio of 24.39. Biogen trades at a P/E of 34.38, while Celgene trades at 48.85. While a few of these stocks seem pricey, this doesn’t scream bubble to me.
However, this does:
Remember the table at the top of this article? It shows the 20 top performing stocks of 2015. As I mentioned before, all but three of these companies are biotech companies.
At the top of the list is Eagle Pharmaceuticals (NASDAQ: EGRX). The stock is up 218% so far in 2015, and 185% in the last three months. Meanwhile, the company isn’t yet profitable.
No. 2 on the list is the Amarin Corporation (NASDAQ: AMRN), up 164% and also not currently profitable.
Wouldn’t you know it, No. 3 on the list – Pfenex (NASDAQ: PFNX) – is also up 164% and also isn’t profitable.
The takeaway is that I believe there to be general froth in the biotech industry.
Is it a bubble? Possibly. But I don’t think we’ll have to see a major collapse to see lackluster returns in biotech stocks over the near term. It is highly unlikely that these biotech stocks will do as well over the next year as they did over the previous year.
Eventually, some catalyst will halt the insane rally in these stocks. If it is indeed a bursting biotech bubble, the collapsing bubble will cut the valuations of low-quality companies as well as high-quality companies, just like it did in the dot-com collapse. Biotech bubble aside, lackluster returns may be the best case for these hot biotech stocks.
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