Is Sequenom the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Sequenom (NYSE: SQNM  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sequenom.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 16.1% pass
  1-Year Revenue Growth > 12% 13.4% pass
Margins Gross Margin > 35% 56.9% pass
  Net Margin > 15% (263.5%) fail
Balance Sheet Debt to Equity < 50% 7.7% pass
  Current Ratio > 1.3 1.15 fail
Opportunities Return on Equity > 15% (222.9%) fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0.0% fail
  5-Year Dividend Growth > 10% 0.0% fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Sequenom had negative earnings during the period. Total score = number of passes.

With just four points, Sequenom falls short of being a perfect stock. The company has some promising technology in its pipeline, but -- as with many small stocks in the biotech industry -- whether it will turn into blockbuster moneymakers is speculative.

Sequenom sells sophisticated medical equipment such as mass spectronomy systems, but its real promise lies in the diagnostic tests it's working on. The company has released a couple of products that test for RHD status and problematic conditions that can cause cystic fibrosis. The product that has shareholders salivating, though, is its test for Down syndrome, which is still in development.

Two years ago, things looked bright for the Down test's prospects. But then the company announced that promising study results were affected by one slight detail: An executive in Sequenom's R&D department told researchers whether subjects actually had Down syndrome before they analyzed the test results. That sent shares plummeting and hurt Sequenom's credibility, despite the fact that the company plans to validate the test in new blind trials.

Personalized medicine is a hot area that has attracted the attention of bigger players in the industry. With some drugs targeted to work only on patients who have certain genetic characteristics, Genzyme (Nasdaq: GENZ  ) , LabCorp (NYSE: LH  ) , and Exact Sciences (Nasdaq: EXAS  ) all stand to benefit by providing the tests that detect those characteristics.

Whether Sequenom ends up a winner remains to be seen. Although its past history falls short of perfection, speculators may want to bet on things looking up in the company's future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Sequenom to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool Alpha owns shares of LabCorp , which is a Motley Fool Stock Advisor pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2011, at 5:14 PM, returnofrnutt wrote:

    In your article, you made a list of what a perfect stock should be. Since Sequenom didn't meet your criteria of what you consider to be a perfect stock, I'd like for you to post a stock that does. I know you must know one perfect stock out there, right? Looking forward to your reply.

  • Report this Comment On January 06, 2011, at 6:45 PM, dlucas8888 wrote:

    Motley,

    Can you explain to me why you choose those type of guide lines for a company that is about to develope new products? Those guide lines is for company that is establish, not for a company that is on a verge of high growth, try to use that for the Amgen when Amgen was a start up, I bid it would look exactly the same.

    So Motley please be intellegent not studpid like your name referring.

  • Report this Comment On January 07, 2011, at 12:40 PM, sirinsocal wrote:

    Sequenom is all about the Down Syndrome Test right now. AJOG will be publishing the study, "Noninvasive Detection of Fetal Trisomy 21 by Plasma DNA Sequencing in a Clinical Setting" any day now. The results of the study have been withheld until the publication. If the accuracy is above 97% the stock goes double digit. Management has already given clues. The CEO, Harry Hixson, a former Amgen president, had these comments on 11/9 when asked about the study "Well I would say we were extremely pleased with the results and we have, the Women’s and Infant’s samples that we have are extremely valuable. And I think we have in excess of $10 million invested in various T-21 samples. We would not embark on the next validation study if we weren’t very pleased with the results of the 450 study". Sequenom began the validation study this week at the Sequenom Center for Molecular Medicine in San Diego.

  • Report this Comment On January 10, 2011, at 4:34 PM, Troy2008 wrote:

    SQNM will still need an FDA study (due to the abortions) no one seems to want to admit.

    More delusion and several years from now it may be a viable test for some.

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