NEW YORK (TheStreet) -- The huge run-up in the price of biotech stocks in the past year has many investors -- and even Fed Chair Janet Yellen -- wondering what kind of legs this rally will have. Not to worry, said Todd Rosenbluth, director of ETF & Mutual Fund Research at S&P Capital IQ.
"We still have a lot of buy or strong buy recommendations on biotechnology companies," said Rosenbluth. "We think that the larger cap companies are still trading at a discounted PE multiple to the broader market and to the health care sector, and they also have stronger catalysts."
Biotechnology was the best performing sub-industry, up 289% from 2011, to 2014, outpacing the S&P Health Care Sector and the broader S&P 1500 indices gains of 118% and 64%, respectively. Nearly a year ago, Yellen famously warned of "substantially stretched" valuations in biotech, as well as social media stocks.
According to Jeffrey Loo, S&P Capital IQ's head of health care equity research, there are a number of facilitators that can keep biotech hot, most notably robust pipelines for the seven biotech companies in the S&P 500 index. Loo expects 10 to 12 compounds will be approved by the FDA in 2015 that have the ability to achieve blockbuster sales within five years. Loo added that Amgen (AMGN) and Gilead Sciences (GILD) pay dividends comparable to older, more mature health care companies despite their high growth rates.
In terms of valuation, Rosenbluth pointed out that biotech is not expensive relative to the broader market. He cited that the S&P 1500 Biotechnology Industry trades at forward P/E multiples of 18.2 (2015) and 15.2 (2016), well below the health care sector's 19.3 and 16.5 and the broader S&P 1500 index's multiples of 18.4 and 15.9.