At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Is it finally time to buy Sequenom?
It's not every day you hear an analyst say "this stock is worth almost twice what it costs," then see the stock in question rise only 3% in response. Yet for Sequenom (NASDAQ:SQNM) shareholders, that's all the bump they got out of Jefferies' big Sequenom upgrade on Monday.
Perhaps one reason investors failed to jump on the news was because Sequenom had already enjoyed a pretty big boost. When earnings came out last week, and showed the company making big improvements in quarterly revenue growth, the stock leapt 19% in a day. Chances are, more than a few investors were happy with that gain, and even happier to cash in their chips and pocket the profit.
Today, though, with Sequenom shares on the move again, it appears a new pack of investors may be taking a fresh look at Sequenom, and at Jefferies' report in support of it. What will they find?
Checking the to-do list
Digging into Sequenom's business last month, fellow Fool Keith Speights laid out three "must-dos" for Sequenom if its business is to thrive. First, the company has to fend off increased competition from rivals Abbott Labs (NYSE:ABT) and Illumina (NASDAQ:ILMN). Second, it has to do this while controlling its own spending. Third and finally, the company has to convince major insurers including UnitedHealth (NYSE:UNH) and WellPoint (NYSE:ANTM) to pay for its MaterniT21 genetic test for Down syndrome.
So how's Sequenom doing with all this? Well, revenue growth was 68% last quarter, so it appears to be off to a good start in the "fending off the competition" race. And while the 49% rise in operating costs doesn't exactly look like stringent cost control, at least these costs rose more slowly than did revenues -- so management deserves at least partial credit for that.
As for winning insurers to its cause, in upgrading the stock yesterday, Jefferies advised that "a proprietary survey ... conducted of US commercial payors representing some 44 million lives ... indicated SQNM is experiencing meaningful traction obtaining reimbursement coverage for its T21 LDT test at average rates that we find more than acceptable."
Depending on how you want to read between the lines, that statement can be read as falling anywhere from "guardedly optimistic" to "cat-that-ate-the-canary overjoyed." And maybe rightly so. On the plus side, management appears to be passing the tests that analysts are setting for it. But on the other hand, it's entirely possible that Wall Street is grading this one on the curve.
Fact is, Sequenom remains a serial stock diluter, an unprofitable enterprise, and one with a history of burning its shareholders' cash. Last week's report showed it has yet to change its ways, with the weighted average share count rising 15%, GAAP net losses up 64%, and cash-burn up an even steeper 68%. So if Jefferies says investors have a chance to get in on the ground floor here at Sequenom... well, maybe they do.
Just remember, though: Just because Sequenom is moving off the ground floor today doesn't mean it's going to keep going up. Elevators go in two directions, after all, and Sequenom investors should shudder over what may await them in the basement.
You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 276 out of more than 180,000 members. (For the record, Needham's CAPS rank is No. 10,506).
The Motley Fool owns shares of Illumina, UnitedHealth Group, and WellPoint. Motley Fool newsletter services recommend Illumina, UnitedHealth Group, and WellPoint. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.