Biotech Sector: Dot-Com Boom 2.0

The NASDAQ bubble from late 1994 to early 2000 was the greatest bubble in modern U.S. history. AOL got to a price/earnings ratio (P/E) of 400 at the top! The problem was that a large company like that could never have grown enough to fulfill such expectations.

But that’s the thing with bubbles… how they inflate to such extremes: They’re irrational.

A new sector comes along, demonstrates higher than average growth rates and before you know it fundamentals are out the window and the stupid money is chasing the market up.

You know how that ends: From dot-com bubble to dot-com bust.

Of course, nowadays, everyone’s thinking about that infamous bubble again because the NASDAQ is back at the highs it once enjoyed into early 2000. And analysts are banding about the most idiotic statement ever uttered in the history of humanity: “This time is different!”

If I hear another person say that, I may just hit them!

OK… technically, this time IS different. Back into 2000, it was the Internet that lead the charge to Nasdaq highs. Today those highs have stalwarts like Google (NASDAQ:GOOGL) and NASDAQ:AAPL and new leaders from social media — I’m talking about companies like NASDAQ:FB and NYSE:TWTR — to thank. But overall the tech sector is much more mature than it was 15 years ago. The great Internet Revolution now permeates every household, every store and almost every nook and cranny possible (with a few exceptions).

So I’ll give you that: it’s different on the surface, but is it really all that different?

Social media companies are now massive corporations that control their respective spaces — Facebook rules the social universe — but aren’t they just as big nowadays as the AOLs of yesteryear?

Really, how much more can they grow… and how fast?

And what do they really offer? What do the social media companies do to improve productivity? It’s a way people can express themselves and have a little fun. But if anything, I’d say they hurt productivity! No company wants their employees goofing off on Facebook half the day. Really, their offerings are a bit nebulous.

This, for me, is a whopper of a red flag!

I have incorporated a 45-year Innovation Cycle into my hierarchy of cycles because it has proved highly accurate and reliable. It shows how clusters of powerful technologies increase productivity and move mainstream for about 22.5 years, like what we saw from 1988 into 2010.

Now we’re in the doldrums of this cycle and won’t move into the next upward swing again until after 2032. In short, the productivity revolution is over for the next two decades or so. That means less earnings and wage gains, regardless of demographic trends.

So this dot-com boom 2.0 concerns me…

We have these “too big to fail” companies that have a negative impact on productivity (mostly) and no tangible offering to really sink your teeth into (think about it… what does Facebook really offer? How about Alibaba?), and boatloads of investors scrambling to get in on the action. Talk about irrational!

It seems to me like yet another reason to get ready for a massive correction later this year and into 2016.

Rather than trying to jump onto a train that really doesn’t have much further to go, look to climb on board one that’s only now pulling out of the station.

I’m talking about biotech. It is still in its infancy; the 0% — 10% stage of its longer term S-Curve but there is infinitely more potential for investments in this developing revolution than there are in today’s more mature technology sector. That’s why it is a sector of great interest to me. And why I think Ben Benoy is fishing in the right pond…

But there’s something else I think Ben’s doing right: He’s not exclusively betting that the biotech market can only go up. Instead, he has developed a unique system that allows him to play the ups and downs with ease. He will be explaining how he does this on Monday, and I think you should watch, particularly because I think this sector faces some rough seas ahead.

It shows you how biotech outperformed the 1995 to early 2000 tech bubble by 31%. More importantly, look how it’s outperformed the current bubble — by 65%!

Yet, in longer term charts, even though the biotech index has seen massively higher highs recently, it looks like that it is merely in a third-wave, with a major fifth-wave much higher in the decades ahead (near the top of the next bull market around 2036).

The question is: Does the Biotech index take a smaller correction than the NASDAQ in the great reset ahead, or does it correct more? After all, it has been volatile on the upswing since late 1994 and especially since early 2009.

I don’t know yet… but this, like India and emerging markets is a longer term picture my team and I are scouring for opportunities.