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.
Diversified health care and biotech ETFs proved highly popular among investors in the first five months of 2015. The iShares NASDAQ Biotechnology ETF (IBB), has climbed 20% year-to-date and 46% over the past 12 months. IBB had approximately $450 million of inflows during the first five months of 2015 lifting its total asset base to $8.8 billion.
Meanwhile, the SPDR S&P Biotechnology ETF (XBI), has $2.4 billion in assets and has risen 28% so far in 2015, and 59% in the past year. As an equally weighted ETF, XBI has just 12% of its assets in its top 10 holdings compared to 57% for the IBB. XBI's weighted average market capitalization is $8.6 billion and the fund has picked up approximately $485 million in assets so far in 2015.
When choosing between the IBB and the XBI, Rosenbluth said conservative investors may want opt for the iShares offering in case the market gets choppy going forward.
"The XBI is more concentrated in some of the less proven small-cap companies where of course there is a boom potential, but a great bust potential and more volatility," said Rosenbluth. "So as we think the market could experience more volatility in the second half of the year, we think this is perhaps a little more risky than investors may be comfortable taking on."