Internet, Biotech Fails to Justify Fed Concern: Chart of the Day

Internet and biotechnology stocks are cheap enough to counter the Federal Reserves concern that they may be too costly, according to Pierre Lapointe, Pavilion Global Markets Ltd.s head of global strategy and research.

The CHART OF THE DAY shows how Lapointe and a colleague drew this conclusion in a report yesterday. They compared the groups forward price-earnings ratios, derived from projected profit, with the ratio for the Standard & Poors 500 Index.

Shares of online companies were about 1.5 times more costly as of yesterday, according to data compiled by Bloomberg for the S&P 500 Internet Software and Services Index. Thats far below a peak of more than 25 times in May 2001. For the S&P 500 Biotechnology Index, the comparable figure was about 1.1, less than half its 2001 high.

If there is a concern with valuation of some high-profile companies, it is not widespread, Lapointe and Alex Bellefleur, a global macro strategist with the Montreal-based firm, wrote in their report.

Social-media and biotechnology stocks rebounded in the past five weeks from losses suffered on July 15, when the Fed referred to them in its semi-annual Monetary Policy Report to Congress. Share prices relative to earnings estimates appear to be stretched, the report said.

It seems that the warning did not bother investors, the report said. The iShares Nasdaq Biotechnology exchange- traded fund ended yesterdays trading 4.8 percent higher than its July 15 close. During the same period, the Global X Social Media ETF gained 7.3 percent.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net Jeff Sutherland, Jeremy Herron

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Internet, Biotech Fails to Justify Fed Concern: Chart of the Day