Biotech Stocks: The Market’s Best Bargain Right Now…
by Robert Williams, Publisher
Last week, I told you that we had collectively moved over $5 trillion in cash from the sidelines to the markets, serving as the rally’s fuel, so to speak.
With all that cash back in play, it’s the economy that now must provide the impetus for the market to push higher. More specifically, we need corporate earnings to grow again. And the only way that’s going to happen is if the economy cooperates.
The prevailing price-to-earnings ratio (P/E) for the market is 23. Which, if you look at the chart below, has us already near the upper range, historically speaking. (Going back to 1900, the average P/E is 16.38.)
If you do the math, the P/E equation works out like this: 1,093 (S&P 500 Index) / $47.52 (earnings per share) = 23 (P/E ratio).
The good news, however, is that analysts’ projections for next year’s earnings per share for S&P 500 companies is $75.61. Which, if plugged into the P/E equation, pushes the S&P 500 to 1,739.
1,739 (S&P 500 Index) / $75.61 (earnings per share) = 23 (P/E ratio).
When viewed through this lens, you can see why it’s feasible for the rally to continue in earnest.
But, more realistically, if the analysts’ predictions on earnings prove to be accurate, I expect the P/E ratio to return to the mean of 16. Which would put the S&P 500 Index comfortably at 1,200.
Given where we were a year ago – financial Armageddon – nobody’s going to complain about that.
And speaking of P/Es, healthcare and biotech stocks are the market’s best bargain right now, trading at a 36% discount to the S&P 500’s 2009 P/E ratio. Our resident biotech expert, Marc Lichtenfeld, gives you a game plan for profits if you are considering investing in the biotech sector.
Ahead of the tape,
Robert Williams
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