Have you ever seen a kid in a candy store? That's how I felt as the stock market fell in recent weeks. Skittish investors were making lots of stocks that I really liked available at discounted prices. So I bought...and bought, and bought. Over a three-week period, I added seven new stocks to my portfolio.
Among those stocks was one that I've watched for around five years. Although I liked the stock, I didn't buy it. And I've kicked myself for not doing so. Since 2013, it's soared more than 500%.
But during the market pullback, I finally pulled the trigger and bought shares of Illumina (ILMN). Here's why Illumina ranks as my top stock to buy in November.
What Illumina does
First, a little background on Illumina. The company pioneered the use of gene sequencing. What is gene sequencing? We'll have to get into a little biology here.
You've no doubt heard of DNA (deoxyribonucleic acid), the building block of all life. DNA is broken into segments called genes. These genes form a blueprint containing instructions for how humans, animals, and plants are built and function. And these instructions are laid out by varying combinations of four chemical bases.
Gene sequencing determines the orders of those chemical bases within a given gene. It accomplishes this task by using different-colored fluorescent dye to link to each of the four chemical bases. That's the simple explanation, anyway.
Illumina uses next-generation sequencing, a process that determines the orders of chemical bases of millions of DNA fragments in a massively parallel manner. Thanks to the company's technology, the cost of sequencing a human genome -- the complete set of human DNA -- has dropped from billions of dollars to around $1,000.
A solid business with a strong moat
I don't have quite as much money to invest as Warren Buffett does, but I like his idea of buying solid businesses with strong moats. Illumina definitely meets those criteria.
The company makes its money in three primary ways. It sells gene-sequencing systems, typically at a cost of hundreds of thousands of dollars -- although Illumina's new iSeq system costs only around $20,000. The company provides services for performing gene sequencing for customers that don't have their own systems. And Illumina sells consumables, which include chemical reagents, flow cells (glass slides where sequencing chemistry occurs), and microarrays (microchip-based testing platforms that enable large volumes of DNA segments to be automatically analyzed at the same time).
It's the last category that is especially lucrative for Illumina. The company generated $853 million of revenue in the third quarter of 2018. Nearly 65% of that total came from the sale of consumables.
Like Cousin Eddie said about the Jelly of the Month Club membership in the movie Christmas Vacation, consumables revenue is the gift that keeps on giving. The more Illumina's customers use their gene-sequencing systems, the more consumables they need -- and the more money Illumina makes.
There are other companies that sell gene-sequencing systems and offer related services. But Illumina is the leader of the pack. Over 90% of all gene sequencing that has ever been performed was done using Illumina's technology.
One area, though, where Illumina hasn't dominated is in long-read gene sequencing. This approach reads DNA sequences at the single-molecule level rather than breaking long strands of DNA into lots of smaller segments.
However, Illumina recently announced that it was acquiring smaller rival Pacific Biosciences of California. PacBio focuses on long-read sequencing, so the deal will make Illumina a key player in the one area of the gene-sequencing world where it wasn't already a leader.
Multiple massive opportunities
As much as I like Illumina's solid business and strong moat, the real reason I rate the stock as a top buy for November is that the company has multiple pathways to growth.
One of those pathways is to continue lowering the cost of gene sequencing, thereby making it more affordable to more customers. That's exactly what Illumina is doing right now with its NovaSeq systems. The company thinks its NovaSeq platform will eventually lead to a $100 or lower price tag for mapping a human genome.
Another great opportunity is in direct-to-consumer (DTC) genomics. Illumina customers Ancestry and 23andMe, along with Illumina spinoff Helix, are enjoying phenomenal growth as individuals flock to discover more about their genealogy and health-related genetic attributes. So far, the U.S. has been the primary source of revenue for these DTC genomics companies, but international markets present significant growth opportunities as well.
Several countries, including the U.S., England, and France, have major population genomics initiatives under way. These efforts involve mapping the genomes of large numbers of people. This translates to more potential systems and consumables revenue for Illumina.
The opportunity I'm most excited about, though, is in cancer screening. Several companies, including Illumina's own spinoff, Grail, are scrambling to develop blood tests that detect multiple types of cancer at an early stage.
If any of these efforts succeed -- and I think they will -- it could mean that blood drawn at patients' annual checkups could be analyzed to determine if they have cancer well before any symptoms show up. I'd want me, my family, and my friends to have such testing done every year. I suspect most people would want it, too. And I'm pretty sure insurers and government payers would pick up the tab if it prevented expensive cancer treatments.
Think for a second about what this scenario would mean for Illumina. As the dominant provider of gene-sequencing systems and services that has consistently lowered the costs for sequencing, the company would see its revenue explode as hundreds of millions of people have their DNA tested each year.
What's not to like?
I admit that I've painted a really rosy scenario for Illumina. Are there things that aren't so positive about the company and its stock? Sure.
For one thing, the stock is priced at a nosebleed valuation. It can be tough for investors to buy a stock that trades at over 50 times expected earnings. Illumina's revenue could be somewhat lumpy as existing customers of its high-throughput HiSeq systems transition to the newer NovaSeq system. That could cause the company to disappoint Wall Street every now and then. It's also possible that Illumina's industry dominance could be disrupted.
Illumina's steep valuation was the primary reason I didn't buy the stock in the past. I've seen the error of my ways, though. My view is that the company's growth prospects over the long run justify Illumina's premium price. And because I'm focused on the long run, I really couldn't care less if Wall Street analysts get their nose out of joint over lower-than-expected sales in a given quarter.
Neither am I worried that Illumina will lose its top spot. While it's possible that rivals could develop great new technology, Illumina isn't resting on its laurels. The acquisition of PacBio shows that the company takes new developments seriously.
So there you have it -- why I think Illumina is the top stock to buy in November. I suspect it will be a top stock to buy for a long time to come.