NEW YORK (FMD Capital Management) -- The majority of stocks have just barely poked their head above the flat line so far for 2014.
While the market has yet to springboard to new highs, equities have still been remarkably resilient to bounce back from a modest selloff in January. The majority of investors are trying to determine whether or not stocks can leapfrog these levels or if we will see another retest of the lows.
However, that story does not translate for every sector of the economy. Areas such as biotechnology and solar stocks have been on a remarkable run for well over a year now that has translated into triple-digit gains for investors that have stayed the course. These stocks are continuing to show amazing strength and are still breaking out to new highs this week.
So the question now becomes, is this an ideal area to add new money or should you start thinking about scaling back your position size?
The iShares NASDAQ Biotechnology ETF (IBB) produced gains of 32% in 2012, 65.51% in 2013, and has already gained another 20% to start 2014. IBB has over $5 billion invested in 123 companies focused on developing new innovative pharmaceutical and medical devices.
Biotechnology stocks are known to be more volatile because of their hit-or-miss business models, which often lead to periods of strong outperformance or underperformance. Often their stocks are affected by factors such as Food and Drug Administration approval, drug trials, R&D costs, legal fees, and a host other unforeseen events. However, they can also lead to big profits when new products are developed and successfully tested.
This exchange-traded fund has truly been on a sky-high adventure that has produced excellent returns for those that got in early. I am hesitant to use the term "bubble" to describe this sector, but it does show signs of valuations becoming stretched and prices hitting extremes. Consider that IBB has a price to earnings ratio of 41.86 (as of Jan. 31) which is almost double the iShares Core S&P 500 ETF (IVV) reading of 21.73.