Has Sequenom Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Sequenom (Nasdaq: SQNM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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% 16.7% Pass
  1-Year Revenue Growth > 12% 21.8% Pass
Margins Gross Margin > 35% 62.8% Pass
  Net Margin > 15% (136.6%) Fail
Balance Sheet Debt to Equity < 50% 10.9% Pass
  Current Ratio > 1.3 4.38 Pass
Opportunities Return on Equity > 15% (106.6%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Sequenom last year, the biotech has picked up a point, thanks to improvement in its current ratio. More impressive, though, is the company's revenue growth over the past year, although profitability still remains a dream.

Sequenom's future depends in large part on its MaterniT21 LDT test for Down syndrome. The company got crushed in 2009 after news that employees had mishandled test data forced it to throw out all of its promising clinical data. After getting help recently from Illumina (Nasdaq: ILMN  ) , however, Sequenom got new data that led to its launching the test commercially last October.

So far, though, the company hasn't yet provided direct sales figures. Instead, it has only suggested that a number of high-profile health-care providers have ordered the test.

Despite Sequenom having the benefits of actually having a product available to sell, investors need to face the possibility that sales won't go as well as expected. Dendreon (Nasdaq: DNDN  ) has sent its shares on a similar roller-coaster ride after its promising Provenge cancer treatment gained approval but got off to a slow start in booking actual sales.

For investors, the worst news is that the company raised capital last week, selling 13 million shares at just $4.15 per share. Given that the stock is already down sharply over the past year, further dilution was the last thing investors wanted to see.

For Sequenom to reach perfection, it simply needs to do one thing: make MaterniT21 LDT a hit. The easiest way to do that would be to get FDA approval for MaterniT21, as that would allow LabCorp (NYSE: LH  ) and Quest Diagnostics (NYSE: DGX  ) to run the test. Anything less is likely to push Sequenom's stock to the bottom of the barrel.

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.

If you're afraid that Sequenom will never truly get off the ground, consider some safer alternatives. I'd suggest taking a look at the Fool's latest special report, absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

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. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services have recommended buying shares of Illumina, LabCorp, and Quest Diagnostics. 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 (2) | Recommend This Article (7)

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 27, 2012, at 9:44 AM, unkownuser wrote:

    I think the events over the past few months have given us a strong indication about where Sequenom is headed; Sequenom is poised to become THE 500 LB GORILLA in the prenatal genetic testing market. I could recite much of what is already known and out there in the press:

    -First to market with a T21, T18, & T13 blood test

    -Insiders buying up shares like crazy

    -Sequenom holds ALL the critical patents in this market

    -Analysts upgrading revenue/pps estimates

    -Sequenom raising capital to fund expansion

    There is also a lot of positive speculation regarding many of the unkown variables, like insurance reimbursements or demand for the test.

    Bottom line here, Sequenom is a winner and will be much higher, much sooner, than just about anyone could imagine.

  • Report this Comment On January 27, 2012, at 9:44 AM, unkownuser wrote:

    I think the events over the past few months have given us a strong indication about where Sequenom is headed; Sequenom is poised to become THE 500 LB GORILLA in the prenatal genetic testing market. I could recite much of what is already known and out there in the press:

    -First to market with a T21, T18, & T13 blood test

    -Insiders buying up shares like crazy

    -Sequenom holds ALL the critical patents in this market

    -Analysts upgrading revenue/pps estimates

    -Sequenom raising capital to fund expansion

    There is also a lot of positive speculation regarding many of the unkown variables, like insurance reimbursements or demand for the test.

    Bottom line here, Sequenom is a winner and will be much higher, much sooner, than just about anyone could imagine.

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