Fear Not, Biotech Stock 'Correction' Is Not a Bursting Bubble

The biotech sector has hit a slump, to put it very mildly. Large cap stocks have pulled back from above-market P/E multiples to inline if not lower than market multiples. The carnage in the small-cap space has been more significant, with many stocks falling close close to cash levels and threatening to trade at discounts. Is this the great biotech bubble bursting that many have predicted for the past year? I doubt it, but that doesn't mean the biotech sector is out of the woods even with the recent recovery on the back of healthcare M&A dea and rumors.

While some may scoff I'm playing with semantics when I argue market bubbles are different than typical market corrections (or even most bear markets), I do believe there is a qualitative and quantitative difference. When I think of a speculative bubble bursting I look back to the Nasdaq and dot-com era of the early 2000s, where the QQQ went from $120.50 in March 2000 to $19.76 in October 2002. That is roughly an 84% decline for an entire sector. If the biotech sector is a bubble bursting like that, then the iShares Nasdaq Biotechnology ETF (IBB) would be bottoming around $44 and nothing would be safe for years if not a decade plus. When the dot-com bubble burst it took all related stocks down, even profitable tech companies like Microsoft (MSFT)went from $60 to $20. To put that in perspective, Gilead Sciences (GILD) would have to drop to $28 to match that sort of decline.

If you liked this article you might like

How I've Prepared for Hurricane Irma -- and a Market Pullback

How I'm Prepared for Irma -- and a Pullback

Juno, bluebird In Focus as Targets Following Gilead-Kite Aquisition

Apple Is the Tom Brady of Stocks: Cramer's 'Mad Money' Recap (Thursday 8/31/17)

Cramer: Fantasy Shmantasy -- Let's Get Real With These Stock Picks