Buy, Sell, or Hold: Sequenom

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 (Nasdaq: 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.

Buy
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 (Nasdaq: 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.

Sell
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 (Nasdaq: 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.

Hold
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 (Nasdaq: 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.

The verdict
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.

Both sequencing companies might be good buys today, but if you're looking for another explosive opportunity in medical technology, here's special free report that you have to see. Click in to learn about the next Rule-Breaking multi-bagger. (I own shares of it, myself.)

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.


Read/Post Comments (5) | Recommend This Article (1)

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 April 25, 2012, at 4:23 PM, megastockmaster wrote:

    I think SQNM has enough of its own umbrella to afford to miss Roche. Unlike LIFE, SQNM has something a mother will use in the doctor's office, if I am not mistaken. I don't know what kind of clearance you need, sir, but the test is fairly cheap and almost anyone can take it -- I think I got the details right -- and the volume is getting pumped up past initial expectations. Should blow the doors off.

  • Report this Comment On April 25, 2012, at 4:33 PM, unkownuser wrote:

    Motley Fool article writers rarely know anything about the stock they are assigned to write about.

    If the stock is in the news (as SQNM for huge gain and volume jump), some half-wit Motley Fool lackey is told to write a story. Depending upon whether or not the Motley Fool management is getting a kickback from a big hedge fund with a long or short position, determines whether the writer is told to pen a positive or negative article.

    Motley Fool articles/advice is worthless, their paid for services are worth even less, they are dangerous to the investor.

  • Report this Comment On April 25, 2012, at 7:18 PM, Mikey925 wrote:

    Once again, we have an author from Motley Fool that is writing about companies that they have no knowledge of.

    Exact Sciences (EXAS) is currently involved in an FDA clinical trial that will be completed in Q4 of this year. They have developed a non-invasive colorectal cancer screening test for the #2 killer of Americans over the age of 50 that costs MediCare $14 BILLION per year.

    This non-invasive test, called "Cologuard" has been validated via two studies conducted by the Mayo Clinic and has shown extremely high sensitivity to colorectal cancer detection, not too mention pre-cancers!

    For some reason, the author claims that EXAS is burning through cash... yet they had $93 million in cash on their balance sheet at the end of 2011.

    Furthermore, they are on track to commercialize "Cologuard" for launch in early 2014.

    The author is also in error when they claim that "nearly 27% of the shares outstanding of EXAS have been sold short." The most recent short interest report (as of April 13th) shows short interest at 7.62 million shares. Given that there are 57 million shares outstanding, the short ratio comes to 13.3% and NOT 27% as the author claims!

    I really wish that people from Motley Fool would do some BASIC homework, before commenting on the companies that they mention; otherwise, it leads to a whole lot of misrepresentation.

  • Report this Comment On April 26, 2012, at 1:53 PM, TMFSelena wrote:

    The 27% of shares sold short referred to SQNM, not EXAS, and that was as of the end of March, which is the latest data Yahoo! Finance was offering. Right now Yahoo! seems to have April 13 data.

    I'm sorry that some of you seem to think I'm trashing EXAS. I didn't mean to -- just to point out that there are some special considerations with these kinds of companies.

    Clearly, a successful colorectal cancer test would have a lot going for it.

    Selena

  • Report this Comment On April 26, 2012, at 3:51 PM, megastockmaster wrote:

    If the margin difference on the cancer test were good enough then the payment would exceed the cost by a lot making EXAS holders forward looking in a good way.

    Is the claim that Roche might consume EXAS's test? I don't think I heard that.

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