You don’t have to look far to find stories of star performers in either the technology (software & Internet) or biotechnology sectors, and the numbers are impressive. For example, PWC reports that in the 3rd quarter of 2014 the biotechnology industry raised $1.05 billion in 110 deals while software companies raised $3.7 billion in 418 deals.
Big shiny valuations of tech startups like Snapchat and Uber highlight the attractiveness of investing in the tech sector. Tech companies generally have low startup costs, often requiring little in the way of physical plant space or HR. Many speculate that the tech sector is a little overheated and ripe for a correction. Others think that we’re far enough along the technology development curve that demand for solid innovative tech products is going to continue to increase… and valuations with it.
While the usefulness of some tech companies can be questioned, there’s always a need for biotech. Biotech’s had an impressive run-up, but the shine hasn’t worn off biotech, not by a long shot. Big pharma and investors have been pumping billions into speculative biotech companies that haven’t yet produced a reliable drug. Indeed, biotech stocks have risen faster over the last few years than any other sector of the market in the U.S. Health care has set new records in 2014 for both M&A spending and IPOs.
Biotech or Tech: A Warning about Increasing P/E Ratios
Whether tech or biotech, Investors have demonstrated willingness to pay higher and higher prices for growth tech and biotech stocks. All this eagerness resulted in many willing to trade at very high price-to-earnings (P/E) ratios. Some of this is due may be due to better business fundamentals or rosy future prospects, but many experts also contend that another culprit is the number of short-term investors who may be overly focused on momentum.
Discipline and Diversification
If you’re a long-term investor, we suggest you exercise discipline and caution when thinking about investing in stocks with really high valuations or P/E’s. Of course, many tech and biotech firms present solid long-term return potential with the technologies, products or services they will generate. Diversification is always a prudent strategy, especially with early stage investing. Cast the net wide; you’ll catch more that way..
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