What Exactly Should Investors Do With Exact Sciences?

Year-to-date gains of 25% don't really tell the full story for molecular diagnostics company Exact Sciences (EXAS -8.40%). There have been plenty of big ups and downs to get to those 25% gains. Since late April, the stock is actually up almost 70%.

This kind of rapid rise could make some investors leery of buying, since what goes up can easily go down. Other investors might say that what drove the stock to current levels can keep on driving it more. What exactly should investors do with Exact Sciences?

Buy?
Colorectal cancer is the second highest cause of cancer-related deaths in the U.S. and the third most common form of cancer. Although an estimated 60% of colorectal cancer deaths could be prevented if adults age 50 and older had colonoscopies, sigmoidoscopies, or other tests, screening rates are low.

Cologuard, Exact Sciences' screening test for colorectal cancer, could be a true game-changer. The test doesn't have the inconveniences associated with colonoscopies, such as bowel preparation, discomfort, and special diets. Cologuard isn't intended a replacement for colonoscopy, but at a cost of only several hundred dollars, it could be a cheaper initial test to determine which patients need a colonoscopy.

It's this prospective game-changer status that has excited investors about Exact Sciences. The company completed its pre-market approval application, or PMA, to the U.S. Food and Drug Administration on June 7. If Cologuard gains approval and wins acceptance by physicians and patients, Exact Sciences could see annual sales of $500 million and perhaps much higher in a few years.

That kind of potential could be attractive for investors -- and possibly for a larger company. In 2009, Sequenom (NASDAQ: SQNM) attempted to acquire Exact Sciences but ultimately no deal happened. Of course, back then Exact Sciences was a penny stock. Now, it has a bigger market cap than Sequenom does.

A more likely suitor these days would be a company like Illumina (ILMN -4.65%). The gene-sequencing company was at one point eyed as a takeover target itself by Roche, but it has done some of its own acquiring in 2013. Illumina bought prenatal test maker Verinata Health in February and another unnamed "development-stage company" in the first quarter.

Sell?
Taking profits undoubtedly ranks near the top of the list of reasons to sell Exact Sciences. Shares are near their all-time highs. If you have held the stock for the last two years, you're sitting on gains of more than 65%. If you have owned Exact Sciences for five years, you have made an 1,850% return.

No one could blame you for selling after racking up those kinds of gains. You would be in good company if you chose to do so. Billionaire Louis Moore Bacon, who runs Moore Capital Management, closed out his position in Exact Sciences not long ago. 

The sell argument also gets at least a little support from the analyst community. Although nine of 12 analysts surveyed by Thomson/First Call rate Exact Sciences as a "buy" or "strong buy," the average of all of the analysts price targets stands at $13.52 -- below where the stock trades currently.

More and more investors are shorting Exact Sciences. Short percent of float is currently more than 16%. That's not extraordinarily high, but it reflects an increase in short interest of more than 80% since mid-March.

Foolish take
I think the best option for investors already holding Exact Sciences shares could be to sell -- and buy. Those who have held the stock long enough to build up nice gains could use a stock-replacement strategy. Sell some or all of your shares and use part of the proceeds to buy in-the-money call options that don't expire until well down the road. That locks in some profit but still allows investors to profit if Exact Sciences keeps its nice run going.

For those investors who don't currently own Exact Sciences, I would be hesitant to jump into a large position at this stage. However, shares could take off even more with FDA approval of Cologuard -- and I suspect that there is a reasonable chance that another company could seek to buy Exact Sciences. Buying a small stake or some call options isn't necessarily a bad idea in my view, but be aware of the risks.