Our Top Stock Idea

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, the Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:

I'm not sure if Illumina, Inc is more fairly valued, undervalued or overvalued since the 31% haircut it took on Friday (10/7/11) after guiding down. Of the three it's very unlikely Mr. Market will think they are "farily valued". I don't give Mr. Market any credit in this volatility to know what that even means. A company guiding down at the wrong time in this market can definitely undershoot. Investors are trigger happy, especially on investments that previously had been enjoying a steady gain that rapidly eroded. Guiding down may result in a haircut on guidance and then another haircut on the reduced earnings report (even though they guided). Sometimes it would be best for a company to just wait for earnings and take one beating instead of two, but that would leave them open to claims they misguided investors.

I noticed Illumina's pludge when I saw a Pacific Biosciences of California [(Nasdaq: PACB)] erasing their two day gains. I didn't have room on my pick list to activate them a few days ago when they seemed to be bottom bouncing. Both make genetic sequencers, but Illumina is far more established and appeared pricey at 4.5x book in this cycle of the economy. Illumina relies on government spending to supplement hospitals, research facilities, colleges, etc, to update their technology. The government spending is now questionable and company's are holding purchases until the situation becomes clearer.

In some cases purchases will just be deferred, in some cases they will be made and in some cases they may not occur for a long time. This means Illumina, Inc needs a "cushion of value" that holds them together even if things get as nasty as Mr. Market decided things just became. Overall, they are no worse than they were Thursday. Banking on government discretionary spending right now if "Foolish".

Illumina sports margins of 12 profit and 25% operating and has about 2X cash to debt. The 21% short sellers should be bailing meaning buying back their shares. Those in at the top can afford to. Illumina has $128 Million YoY growth meaning they have enjoyed some growth even during this troubled period. While from my limited research Pacific Biosciences may have a more fully featured device, Illumia has the market share already. In the medical industry people buy what they know and trust. Illumina also has consumables that go with their products.

Overall, I'm willing to make a play that Illumina, Inc has some margin for the current economic hiccup and deferred sales will materialize. Normally I like to see a 2-3 day cooling off period after such a large sell-off and confirmation that other holders don't "sleep on it", lose sleep and decide to join the stampede to the door. In the long run, I see this as a good opportunity and I think that long term Illumia has a bright future.

Target: In this type of sell-off with this type of Market?? Short term may go down a few more percent, may go down again if Congress carries a big cutting ax, OR could stabilize. Long term, a slow climb up over the next year, I'll have to play this one over time. Don't fall in love with your stocks and don't get greedy!

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