The 1 Stock I'd Buy Right Now

The business delivered a solid operational performance in the first quarter of 2019. Revenue grew 17% from the year-ago period. Operating income of $11.5 million was equivalent to roughly half of the total from all of 2018. And the company exited March with cash, cash equivalents, and marketable securities of $206 million.

How did Wall Street react? By sending shares of Genomic Health (GHDX) tumbling 11%, of course.

Analysts were displeased that management punted on the chance to raise full-year 2019 revenue guidance and instead maintained initial expectations for 11% to 14% growth compared to last year. Since revenue grew 17% year over year in the opening quarter, that implies growth will slow as the year drags on. In essence, the company was punished for maintaining guidance.

Individual investors with a long-term mindset shouldn't be nearly as concerned. In fact, given the recent stock slide, Genomic Health is the one stock I'd buy right now. Here's why.

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By the numbers

Genomic Health reported Q1 revenue of $108.8 million driven by increases across all core products. While that represented 17% growth from the prior-year period, what's more impressive is that the company actually managed to reduce the cost of products sold by 9% in that span. That drove a significant increase in gross profit and, together with a similar decline in R&D expenses, helped to offset rising selling and marketing expenses. The result: a $16 million positive swing in operating income.

Data: SEC filing, press release.

As the revenue growth suggests, Genomic Health reported a healthy increase in the number of tests sold. More than 37,580 Oncotype DX Breast Recurrence Score and Oncotype DX Prostate Score test results were delivered in the first quarter, marking a 16% increase from the same period a year ago.

Growth should continue thanks to the results of the recent clinical studies reported in March and last summer's TAILORx trial, which demonstrated the value of using Oncotype DX tests to personalize treatment and improve patient outcomes. The extra data will help the company earn expanded insurance coverage and reimbursement in the U.S. and globally, which underpins the core of Genomic Health's growth strategy. While Wall Street has yet to fully grasp that, the miscalculation by analysts creates an opportunity for individual investors.

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The industry has changed, but Wall Street is still catching up

Whereas the genetic testing leader is focused on improving profitability and access to markets, analysts are still focused on revenue growth and the average selling price (ASP) of tests. Wall Street is using an outdated playbook for the industry.

For example, Genomic Health is becoming more focused on increasing margins and profits in 2019. While that's driven by revenue growth, revenue growth in the genetic testing industry today is driven by greater access to markets. Wall Street still seems too focused on ASPs (likely because of headwinds faced by industry pioneer Myriad Genetics), but the ability to sell high volumes of low-cost, high-quality tests is now more important to a company's success. After all, there are diminishing returns available from increasing gross margin beyond the current 84.4%.

Therefore, Genomic Health is better off increasing its ability to sell more tests than focusing on ASPs. The business has successfully gained broader access to patients by earning insurance coverage and reimbursement in more markets, which it's accomplished with a steady stream of favorable clinical results.

CFO Brad Cole said on the Q1 earnings conference call that management's decision to stand firm on initial full-year 2019 revenue guidance was driven by TAILORx trial results released last summer. The favorable data boosted Q1 2019 revenue by about 3% but had no effect on Q1 2018 performance. Excluding that, year-over-year revenue growth would have been 14%, at the top end of full-year 2019 expectations.

In other words, if Wall Street was focused on the importance of market access instead of ASPs and profitability instead of revenue growth, shares probably wouldn't have tumbled since the first quarter results were shared. Individual investors might find that to be a great opportunity.