Buy, Sell, or Hold: Sequenom
Apr 25th 2012 1:27PM
Updated Apr 25th 2012 1:28PM
When considering any stock for your portfolio, don't be swayed just by the positives. Examine its pros and cons, and decide whether its possible upsides outweighs its risks. Let's take a look at Sequenom (NAS: SQNM) today and see why you might want to buy, sell, or hold it.
Sequenom is a company specializing in molecular diagnostics and genetic analysis. It develops tests for prenatal genetic disorders and diseases, largely under the SEQureDx brand, and with its MassARRAY system it provides DNA/RNA analysis services. The company's stock is down about 35% over the past year, suggesting that it might be facing some troubles -- or that it might be a bargain.
One reason to consider Sequenom is its size. It's relatively small, with a market cap under $600 million. That means that if it executes its strategies successfully, then it has a lot of room to grow.
More important, though, is its business: biotechnology and genetic testing. As our global population grows and ages, health-care products and services will see demand grow.
Investors are pinning a lot of hope on the company's MaterniT21 offering, which gives mothers a way to test for Down syndrome via a simple blood test instead of the invasive amniocentesis needle. Shares surged 11% recently, when health-care-cost-management specialist MultiPlan signed up to offer the product to its clients. MultiPlan's network features more than 900,000 providers, so this is a big deal that could really boost sales. Some expect sales to double annually in the near future.
Biotech investors like to see promising products in company pipelines, and Sequenom's pipeline holds some promise. The company holds "exclusive rights to intellectual property for noninvasive prenatal testing using circulating cell-free fetal nucleic acids," and "exclusive worldwide licenses to develop and commercialize diagnostic tests to predict genetic predisposition to late stage age-related macular degeneration (AMD)."
The company is forward-looking; it has signed a multi-year agreement with Illumina (NAS: ILMN) , which provides sequencing equipment and supplies. (Swiss pharmaceutical company Roche (OTC: RHHBY) recently tried to buy Illumina, and failed. Look for it potentially to seek another sequencing company to park under its umbrella.)
Finally, market dynamics can help propel Sequenom. As the cost of sequencing falls more will be able to afford it, which likely will boost demand.
A drawback to investing in promising technologies is that they don't always perform as expected, or sell as quickly as expected. Consider EXACT Sciences (NAS: EXAS) with its Cologuard colon-cancer detection system. The test is in late-stage clinical trials, but is not yet approved. It could take years for it to be approved and sell briskly, if those things even happen. Like EXACT, Sequenom is burning through cash. It may need to partner with a deep-pocketed pharmaceutical company, and if it does, it will likely have to share profits. It might alternatively issue more shares of stock, and thereby dilute existing shares -- which it has done in the past.
Also of interest is that many investors don't have much faith in the stock, as nearly 27% of shares outstanding had been sold short as of the end of March. These folks might be concerned about the company's negative free cash flow, and might be thinking that even if its future is bright, the shares have gotten ahead of themselves now.
Given the reasons to buy or sell Sequenom, it's not unreasonable to decide to just hold off. You might wait for its sales growth to increase, or for it to post a bunch of quarterly results in the black.
While you wait, you might want to look at other companies involved in genetic sequencing. Life Technologies (NAS: LIFE) , for example, has been steadily growing and setting records. Despite having significant debt, it also has significant cash, and plans to buy back shares of its stock.
I think I'll be holding off on Sequenom, at least for now. After all, there are plenty of compelling stocks out there with more certain futures.
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At the time this article was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter here, holds no position in any company mentioned. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Illumina. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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