2 Ultra-Expensive Biotech Stocks Still Worth Buying
Biotech stocks are well-known for their eye-popping valuations. What causal investors may miss, though, is that classic valuation metrics -- such as the price-to-earnings ratio -- rarely capture the true value of a biotech company. Successful biotech investing, after all, really boils down to understanding a company's deep value -- not necessarily its free cash flows, near-term earnings projections, or even its financial capacity for business development.
What is deep value in the complex world of biotech? Deep value is anything that creates a bona fide competitive moat. It can be a company's uncanny ability to repeatedly bring important new therapies to market, historical dominance over a particularly high-value disease indication, and/or a key figure in the management team.
In short, biotech companies earn premium valuations by consistently proving that they can stay one step ahead of the competition -- a herculean feat that most companies in the space flat out fail to do. The lesson here is that investors would be wise to take traditional valuation metrics with a huge grain of salt when it comes to biotech, and instead, focus squarely on a company's competitive positioning.
Source Fool.com
