Is Complete Genomics the Perfect Penny Stock?

Low-priced stocks are often low-priced for a reason: They have significant problems to overcome. Yet for those that have fixed their problems, they may be ready to take off to the next level.

At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning single-digit investments. We identify them with a penny icon, and by pairing up their opinions with companies trading for pennies on the dollar, relatively speaking, we may end up with more than just chump change.

Of course, just because a stock is low priced, that isn't necessarily enough to suggest it will have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. But this week we look at biotech Complete Genomics (Nasdaq: GNOM), whose shares have nearly doubled in value from their recent lows and today trade at just over $3 a share as the company awaits approval of a buyout offer from a Chinese genomics company.

Complete Genomics snapshot

Source: FinViz.com.

It slices! It dices!
According to a Wall Street Journal story earlier this summer, the price of whole-genome sequencing is rapidly declining, and the "$1,000 genome" is in sight. Gene sequencer Complete Genomics said its new technology would bring the cost down to a range of $5,000 to $10,000, but with lower prices given for volume, the possibility that anyone could afford to have a genome sliced and diced becomes ever closer to reality.

A new lab is poised for approval by the Centers for Medicare and Medicaid Services, giving it the ability to better compete against larger, better-financed rivals such as Illumina (Nasdaq: ILMN) and Life Technologies (Nasdaq: LIFE). Both of those had tumbled after the National Institutes for Health cut back on R&D funding, but the potential for the space has revived the outlook, and both Illumina and Life have roared ahead, closing in on the highs they hit to start the year off.

Although the spigot of government money is being closed off, there are still real-world applications for the technology. Sequenom (Nasdaq: SQNM), for example, uses Illumina's sequencing machines to run its highly accurate prenatal MaterniT21 tests for detecting the presence of Down syndrome.

Leverage of its own
BGI-Shenzhen, a Chinese operator of genome-sequencing centers that currently purchases equipment from both Illumina and Life Technologies, agreed to acquire Complete Genomics for about $118 million to expand in the U.S. market. Although CG's tests are slower than those of its rivals, they're deemed to be more accurate, and the acquisition makes them less dependent on the pair.

The offer isn't a complete surprise, as Complete Genomics announced back in June that it wanted to pursue strategic alternatives, code for shopping itself to the highest bidder. The R&D cuts have hurt smaller shops such as Complete and Pacific Biosciences of California (Nasdaq: PACB) even harder than their rivals, and while trial lawyers immediately moved in to file lawsuits over the acquisition deal, the DNA sequencer was in danger of running out of cash.

Complete was already cutting back on capacity expansion and cutting jobs until the market for sequencing picked up, as there was just $43 million on the balance sheet in cash and short-term investments. With operating activities using more than $37 million over the first six months, it was a race against the clock. Its outsourcing model was proving effective, but Illumina adopted a similar strategy, and that made it imperative it find a partner able to fund its operations.

Roche had been mentioned as a possible candidate, and it's always possible the company could still step forward with a competing bid. Don't be surprised if the stock trades above the $3.15 offer price soon enough on the expectation that someone ponies up a higher price, but management did strongly endorse BGI's bid, which may explain why it's currently trading below the buyout price.

Make some change
The CAPS investment community gives Complete a low two-star rating, perhaps believing it wouldn't be able to maintain a competitive footing against Illumina or Life Technologies, but tell me in the comments section below whether you think Complete Genomics will receive a higher offer or whether this is the best it can do.

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