Biotech, Social Media Stocks Are Less Frothy Than Janet Yellen Thinks

NEW YORK (TheStreet) -- A month after Federal Reserve Chair Janet Yellen said they were overvalued, Internet and biotech stocks continue to push to new highs.

Both the First Trust Dow Jones Internet Index (FDN) and SPDR S&P Biotech (XBI) exchange-traded funds led markets higher Wednesday, fueled by the better-than-expected earnings season and improving outlooks.

The Internet ETF is heavily weighted towards Facebook (FB), Amazon.com (AMZN), eBay (EBAY), Netflix (NFLX) and LinkedIn (LNKD).

The biotech ETF is comprised mostly of Puma Biotechnology (PBYI), Insmed (INSM), Pharmacyclics (PCYC), Vertex Pharmaceuticals (VRTX), Gilead Sciences (GILD).

FDN Chart
FDN data by YCharts

Last month, Yellen signaled during her testimony on policy that interest rates will likely remain low and monetary policy will remain "accommodative," but she identified social media and some biotech stocks as looking "frothy." Yellen warned that investors may be reaching for yield and perhaps taking on too much risk.

These comments sparked a selloff in both sectors and contributed to the decline in U.S. equities over the past month. But recently the ETFs representing social media and biotech surged higher as impressive quarterly results have strengthened the fundamental outlook of each sector.

Large-cap biotech leaders Biogen (BIIB) and Gilead Sciences easily beat second-quarter earnings estimates. Biogen increased its full-year revenue range for 38%-41% growth from 26%-28%, above analysts' average of 28.5%. It also expects earnings per share of $12.90-$13.10, more than $1.50 above its prior guidance.

Meanwhile, Gilead earnings, accelerated 372% to $2.36 a share, beating the consensus by 58 cents. Sales leapt 136% to $6.53 billion, topping views by $67 million. The company's Hepatitis C drug Sovaldi, launched in December, generated $3.48 billion in sales, well above consensus of $2.58 billion.

GILD Revenue (Quarterly) Chart
GILD Revenue (Quarterly) data by YCharts

Similarly, Facebook and Twitter (TWTR) beat forecasts and raised guidance for the rest of the year.

Facebook is having huge success with its mobile business, which now accounts for 62% of advertising revenue. Along the same lines, Twitter, which lost $277 million in the first half of the, had an operating cash flow of $124.4 million, up 12-fold from last year. The company reinvested most of it in product development.

FB Cash from Operations (Quarterly) Chart
FB Cash from Operations (Quarterly) data by YCharts

Both the biotech and social media sector are very diverse, with some companies truly trading far above rational valuations. The point to be made, however, is that the current economic landscape does have a place for both biotech and social media companies among the largest, most stable indexes. These are companies with solid fundamentals, not merely momentum stocks waiting to be shorted.  

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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