Is Sequenom Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Sequenom (NASDAQ: SQNM  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Sequenom's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Sequenom's key statistics:

SQNM Total Return Price Chart

SQNM Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

184.7%

Pass

Improving profit margin

52.2%

Pass

Free cash flow growth > Net income growth

(65.3%) vs. (73%)

Pass

Improving EPS

6.6%

Pass

Stock growth (+ 15%) < EPS growth

(31.7%) vs. 6.6%

Pass

Source: YCharts. * Period begins at end of Q1 2010.

SQNM Return on Equity Chart

SQNM Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(75.8%)

Fail

Declining debt to equity

No debt

Pass

Source: YCharts. *Period begins at end of Q1 2010.

How we got here and where we're going
Sequenom has put together one of the best scores ever mustered by an unprofitable company, missing out on a perfect score only because its return on equity has tanked over the past three years. But should investors really be cheered by this apparent upward momentum, in light of its weak share performance and continued unprofitability even during a period of rapid revenue growth? Let's dig into some key facts about Sequenom to figure out if these results portend better days.

Investors have begun to warm to Sequenom's top-line growth, as the company's latest earnings report showed a divergence between revenue and profit that was nevertheless worth a big boost in share price. The company's flagship MaterniT21 test has now been run more than 100,000 times, and hopeful notes from Sequenom's CEO on the potential for insurance reimbursement were no doubt well-received.

However, Sequenom's success is hardly assured in the fiercely competitive sequencing field, particularly following a wave of consolidation this year that saw machine maker Illumina (NASDAQ: ILMN  ) pick up a similarly positioned diagnostic company and that recently delivered Life Technologies (NASDAQ: LIFE  ) into the arms of Thermo-Fisher Scientific. Sequenom may be debt-free, but it doesn't have the same resources as these two companies, which have been the driving forces behind the Moore's-Law-plus pace of sequencing cost declines. These two buyouts also reduce the likelihood of a Sequenom buyout, reducing investor options somewhat. At least Sequenom has a thumbs-up from OB/GYNs for MaterniT21, which is going to be a huge boost in visibility from the company's key physician specialists.

Putting the pieces together
Today, Sequenom has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Keep track of Sequenom by adding it to your free stock watchlist.

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