Market data is displayed on the screens at the Nasdaq MarketSite in New York, Thursday, April 23, 2015. The Nasdaq composite has closed at a record high for the first time since the dot-com bubble of 2000.
Seth Wenig—AP
By Paul J. Lim
April 24, 2015

The Nasdaq composite, that iconic index that came to symbolize the Internet economy of the late 1990s, has done something it hasn’t accomplished since Al Gore was relevant — it set a new record high.

The Nasdaq closed at 5092.08 on Friday, up slightly from the previous high of 5048.62 established on March 10, 2000. Of course, the last time the Nasdaq blazed new territory, the stock market slid into a decade-long funk, as the market spent years recovering from the euphoria and high prices created by the the tech stock mania.

This time around, investors seem convinced the Nasdaq is nowhere near bubble territory.

After all, many of the tech giants that dominated the Nasdaq’s late 1990s run — Microsoft, Intel, Cisco Systems and Oracle — now trade at P/E’s of 14 or below, making them even cheaper than the broad market.

But this recent Nasdaq run, which began five years, at the depths of the global financial panic, has been driven by an entirely different group of stocks.

Since this bull market began in March 2009, the best-performing group hasn’t been information tech, but rather biotech. And there are a few things you need to know about biotech’s spectacular run:

1) This biotech boom rivals tech’s run in the 1990s.
Biotech companies have soared more than 500% over the past five years, far outpacing the broader Nasdaq and S&P 500. That’s saying something because both indexes have had really good runs themselves.

^NBI data by YCharts

Indeed, over the past five years, the iShares Nasdaq Biotechnology ETF, which gives you exposure to the biotech stocks in the Nasdaq, returned 20 percentage points more annually than the S&P 500.

Yet unlike tech in the ’90s, biotech’s rise has gotten surprisingly little attention. Doug Ramsey, chief investment officer for The Leuthold Group, refers to the surge in biotech and healthcare in general as “one of the great stealth sector bull markets I’ve ever seen.”

2) Biotech is frothier than it looks.
The fact that Amgen and Gilead Sciences, the industry’s absolute biggest players, have generated strong earnings growth lately — and therefore trade at reasonable P/E’s — belies a bigger problem in the sector.

The next biggest companies in the Nasdaq Biotechnology Index aren’t so appealing from a valuation perspective. Regeneron Pharmaceuticals trades at a P/E of 157. Vertex Pharmaceuticals had no 2014 earnings. Biomarin Pharmaceutical had no 2014 earnings. Incyte had no 2014 earnings. Endo International had no 2014 earnings. and Jazz Pharmaceuticals sports a P/E of 286.

But the real problem isn’t even with these established names, but rather the smaller players in this industry. Among small-cap biotech names, “some valuations are absolutely obscene,” says Mike Tung, co-manager of the Turner Medical Sciences Long/Short Fund.

3) Biotech has a long history of booms and busts.
After showing major promise, biotech stocks have consistently found a way to let investors down — like in 1986, 1987, 1992, 1994, 1997-98, and pretty much from 2000 to the start of 2009.

To be sure, biotech bulls frequently cite the recent wave of mergers & acquisitions and initial public offerings in this space as an argument for why this rally has legs. But Panos Mourdoukoutas, an economics professor at Long Island University, argues that the M&A boom — and the race to get a piece of the action — may be exactly what turns a hot investment trend into an official mania.

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