Tuesday, June 30, 2009

Is the biotech sector cheap?

According to Dr. Steve Sjuggerud, biotech stocks are currently cheap, based on the price/sales ratio. At the tech boom peak, the P/S ratio was over 20. Today, due to last year's massive market decline and subsequent difficult financing environment, the P/S ratio lies at 3, near it's bottom during the late 1990's.

The media and public have also become enamored with green technology and the massive government boondoggle of tax-and-spend. My personal opinion is that clean technologies like solar and wind power won't gain meaningful traction for years, if not decades, and will only exist as long as government subsidies support their money-losing business models.

Biotechs have also participated in the huge rally since March 6, up over 30%. My cohorts and I have profited immensely as a result, a product of due diligence, prescient market timing, and frankly, instincts and luck. Fear ruled the market in early March, and it just smelled overdone. The due diligence on pivotal events catalyzed the outsized gains.

To summarize, Dr. Sjuggerud likes biotech for the following reasons: they're cheap, unloved, and in an uptrend. I'm just glad my buddies and I picked up on this trend a few months ago.

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