Feds Revealed Potential Stretching in the Biotech and Social Media Stocks.

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By jcameron on July 17, 2014 Consumer Staples

On Tuesday, chaos spread in Wall Street when the Federal Reserve unveiled bubbles in the biotech and social media stocks.

The bankers, more often than not, do not keep an eye on the stocks. However, the Federal Reserve recently revealed some stretches in the biotech and social media sector. Fed says that value metrics for some smaller companies have been made to seem stretched.

The news is not tremendous and earth-shaking for those people who keep up with the equity market since the social media and biotech stocks have shown pullbacks in the recent past as well; the shrinking of stocks resulted due to decreased valuation. According to Ed Yardeni, the president of Yardeni Research, a financial and investment advisory firm, the news that Fed broke to the market was not new for professionals. He further stated that it looked like as if the Feds had been following the newspapers.

However, since the word was given by Feds this time, a complete chaos took over the market and people started off selling their stocks in Wall Street.

Although the Feds mentioned stretching of “smaller” companies’ stocks, the news affected the stocks of big giants as well. Stocks of Amgen (NASDAQ:AMGN) and Facebook (NASDAQ:FB), two big companies, fell down by 2 percent. Similarly, stocks of two medium sized social media companies, Twitter (NASDAQ:TWTR) and LinkedIn (NASDAQ:LNKD) slumped by 1 percent.

Feds’ warning did not only affect the social media and biotech stocks, rather it affected the whole market: the composite of Nasdaq shed by 1 percent. It is important to note here that Nasdaq is an American Stock Exchange and its market capitalization makes this stock exchange the second largest in the world. Many biotech and social media companies are registered with Nasdaq.

Interestingly, even with falling values, the social media and biotech stocks are still expensive in the market. Stocks of Vertex Pharmaceuticals (NASDAQ:VRTX), an American company in the field of biotechnology, fell down by 2 percent following the Feds’ disclosure. However, as of Monday, the stocks have a (P/E) price to earnings ratio of 136; such a high P/E makes Vertex Pharmaceuticals (NASDAQ:VRTX) the second-most expensive company in the Nasdaq 100. Similarly, Facebook, the most popular social media company, has a price to earnings ratio of 37, which is quite high when compared to other stocks registered on the same stock exchange.

Global Equities’ Managing Director, Steve Weeple, said that biotech stocks have huge value in other areas of this industry. According to the managing director, there are some very strong companies in the biotechnology industry, like Celgene (NASDAQ:CELG), Gilead (NASDAQ:GILD) and Amgen (NASDAQ:AMGN), which deserved the analyst firm’s ratings as there exist no ‘concept stocks’ anymore.

Where the Federal Reserve, in its monetary policy report, warned about the potential stretching in the stocks of some companies, particularly the small companies in the biotech and social media arena; the central bank, on the other hand, has not commented on this news, nor is it worried about the market.