Why Are Biotech Stocks Creating a NASDAQ Bubble?

Photo of author

By Jacob Maslow

blood sampleNow that the NASDAQ has blown past the 5,000 mark, a cold realization has dawned on many market observers. The harsh reality behind the NASDAQ’s meteoric return to the 5,000 mark is rampant speculation. This is precisely the kind of realization many of today’s investors would rather avoid. Indeed, it is the same kind of blind speculation that has led to an 80% decline in the NASDAQ 500’s value the last time it reached the 5,000 mark 15 years ago. Obviously, nobody wants to repeat history because repeating history can be very painful. Imagine, all the wealth went up in flames due to the first Dot Com bubble.

Well, a lot of market analysts are pinning the blame on technology stocks, namely internet and social networking companies for today’s NASDAQ overvaluation. However, if you look at the actual weight of the biotechnology space on the NASDAQ index, you can see that it is playing a disproportionate role in pushing up the value of the NASDAQ. Also, among the biotechnology firms within the NASDAQ index, a lot of them are immature. In other words, they have already gone public even though they haven’t started clinical trials for the drug that they are looking to patent. Moreover, the price-per-earnings ratios for most of these companies are sky-high.

If you put all these factors together, it is enough to make a veteran NASDAQ observer break out in a cold sweat. If you are looking for a bad guy to blame if the NASDAQ bubble explodes in a very violent way that affects not just US markets but global markets, biotechnology is one good candidate to take the blame.

Images Courtesy of DepositPhotos