Chart Explains The Biotech Bull Market

BOSTON ( TheStreet) -- The current biotech bull market is summed up nicely in the chart above, created by ISI Group analyst Mark Schoenebaum.

Take a look at the blue line. That's the Nasdaq Biotechnology Index (NBI), a market cap-weighted index containing 120 biotech and drug stocks. The NBI is now trading at an all-time high, blowing past the previous all-time high of 1,596 set in March 2000.

Why is this new high for the NBI so significant? Look at the blue line on the chart again. The years 1999 and 2000 encompassed the go-go years of the genomics bubble when investors went bonkers for biotech and drug stocks. (Human Genome Sciences, a "genomics" drug company at that time, traded over $100 per share.) The genomics bubble burst in 2000 and the subsequent crash hit biotech stocks hard and lasted several years.

With the NBI making new all-time highs seemingly every day, should investors worry that we're deep into another biotech stock bubble today? Schoenebaum argues no (at least not yet) because from a valuation perspective, biotech stocks are on a much stronger financial footing today than they were in 2000.

Take a look at the red line on the chart, which represents the median price-to-earnings multiple for the same time period. In 2000, as biotech stock prices were peaking, so were P/E values. Today, biotech stock prices are stronger than ever -- Celgene ( CELG), Gilead Sciences ( GILD), Biogen Idec ( BIIB) and Amgen ( AMGN) are all trading at all-time highs. The P/E multiple for the biotech sector is way below its historic high, however, and the aforementioned big-cap stocks could triple even quadruple earnings over the next several years.

This is the chart that generalist investors love because it tells them that biotech and drug stocks are still cheap, Schoenebaum says. So, while investors who specialize in healthcare, particularly long-short hedge funds, worry about stock prices getting overheated and watch their screens anxiously for signs of a correction, interest in buying healthcare stocks from generalist investors has never been higher, he says.

And that's why the NBI is trading at an all-time high.

How long will this biotech bull market last? If you have thoughts, leave them below.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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