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Biotech stocks are up big, but the sector is not in a bubble— in fact, there is more room to run, analyst Michael Yee said Friday.
The NYSE Arca Biotech index is up over 54 percent from a year ago and hit all-time highs this month.
However, Yee noted that there was some consolidation in April and May, which he loved.
"We're about to break out … I think what you're seeing is great secular fundamentals in biotech, combined with great charts," the RBC Capital Markets biotech analyst said on CNBC's "Power Lunch. "
While the stocks are not cheap, they're not expensive, he added. What investors are paying for is high quality growth and high quality earnings.
In fact, he thinks people have underappreciated biotech's "fantastic" margins, noting that the companies now have 50 to 70 percent operating margins and "tons of real cash flow."
"These are real profitable companies showing that innovation with new drugs, new profits, cash flow, [and] all of that is leading to big profits."
Specifically, Yee thinks there are three names that are poised to break out.
First, Vertex Pharmaceuticals is about to get FDA approval for a breakthrough cystic fibrosis drug, he said. "I want to own that stock on this big earnings cycle."
He also likes Biogen, which he said has "tons of profits" and a possible new Alzheimer's drug in the pipeline.
Lastly, Gilead Sciences has big profits, a low price-earnings multiple, and will be building its pipeline, he said.
Meanwhile, when it comes to the best M&A candidate, Yee has his eye on Biomarin Pharmaceutical. This "orphan company" is doing about $1.5 billion in revenue and could be raking in $2 billion to $2.5 billion over the next few years, said Yee.
—CNBC's Brenda Hentschel contributed to this report
Disclosures: RBC Capital Markets is currently providing Biogen Idec Inc. with non-securities services. A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for Gilead Sciences, Inc. in the past 12 months. RBC Capital Markets is currently providing Gilead Sciences, Inc. with non-securities services. RBC Capital Markets has provided Gilead Sciences, Inc. with investment banking services in the past 12 months. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from Gilead Sciences, Inc. in the past 12 months. No disclosures for BioMarin Pharmaceutical Inc. and Vertex.