Personalized Medicine Stocks

One of the paradoxes of modern life is that the more we know as a society, the less we can each know individually. Let me explain.

When my grandfather was in high school, he only had to learn history up to 1908. My son, however, has a hundred years more to learn about. That's seventeen U.S. presidents, two world wars, the rise and fall of Communism, the advent of commercial aviation, prohibition and its repeal, the defeat of smallpox, mumps, measles and polio in this country, the attacks of September 11, 2001, two stock market crashes, the advent of genetic research, the invention of television, computers, space travel, cell phones, GPS systems, and more.

What my son doesn't know--and will probably never know--is how to drive a manual-shift car, how to tend a coal fire, how to ride a horse, and how to load a flintlock rifle.

And I have no problem with that; those skills are no longer necessary for success in our society.

It's also increasingly less useful here in the U.S. to know how to run a lathe, how to change a flat tire, and how to do long division by hand. The world is changing, so we try to teach every generation the new skills they need to thrive.

But it appears to me that as we become increasingly specialized in our occupations as the decades and centuries roll by, we become increasingly distanced from people in other occupations. A few millennia ago, when we were simply hunting-and-gathering, we were all pretty much on the same page. Today we've got immunologists who are expert in the workings of the human body, semiconductor designers who continue to develop electronic devices that further the communications revolution, and aeronautical engineers designing planes that have the ability to fly themselves.

(We've also got legions of people who failed to graduate from high school, but that' s another issue.)

Complex World

Ideally, these people find common grounds in other topics ... children, sports, teams and politics. But I wonder sometimes about what's been lost as the world has grown so complex that no one person can understand it all.

In fact, I've long fantasized that someone like Leonardo de Vinci or Galileo appears, time-traveling from the past, looks around and asks me, "Can you explain to me how all these things work?"

These days (in my fantasy), I say, "Sure, just let me open up Google and Wikipedia."

Which leads to the revelation that the role of the wise village elder has been assumed by the Internet (the electronic cosmos), which knows nearly everything about the past and the present, if not the future.

And which brings me to today's stock, in an industry so exotic that when I write about it I sometimes feel like I'm speaking Chinese.

(But it's not Chinese.)


Markets Are Never Wrong; Opinions Are

These words are credited to Jesse Livermore, who became one of the world's most successful stocks traders and who believed in the following investing rules:

1. Have proper money management (keep losses short and never average down), 2. Pay close attention to the tape (the market knows all; take the path of least resistance), and 3. Have emotional control (avoid hope, overconfidence and tips from friends and lovers)

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Genetic Medicine Stock

The industry is the realm of genetic medicine and the stock is Illumina (ILMN), currently trading in the low-60s.

Illumina is one of two major public companies that make tools used for genetic medicine. The other is Affymetrix (AFFX). To say that they've been competitive would be polite; there have been lawsuits and countersuits about intellectual property in recent years.

But three weeks ago, both companies agreed to drop all legal claims, and Affymetrix agreed not to sue for a period of four years, after Illumina agreed to pay $90 million to Affymetrix.

The winner in the deal, according to the market? Illumina!

Since the announcement, ILMN is up 7% while AFFX is down 11%.

Year-to-date, ILMN is up 9% while AFFX is down 9%

So what exactly does Illumina do?

Well, on January 14, Mike Cintolo wrote the following for Cabot Top Ten Report:

"The future of healthcare may very well be "personalized medicine," a sci-fi -worthy vision of diagnoses from DNA samples and treatment tailored to patients' unique genetic profiles. This vision depends totally on the realization of economical, commercially viable DNA analysis. The clear leader in the industry is Illumina, maker of large-scale tools for genetic analysis with the high throughput rates necessary for commercial viability. Until then, Illumina's technology is already invaluable as a basis for disease research, drug development and molecular testing. All three applications got a boost, and a milestone on the way to economic viability was passed, earlier this month when Illumina launched two new BeadChips, the Infinium High-Density Human1M-Duo and Human610-Quad. Both contain even more information than existing tools, meaning they can recognize and analyze even more genetic variations. On top of that, both chips double sample throughput and reduce DNA sample requirements by 70%. As if that's not enough progress for one month, the company has announced that it will double production capacity over the next several quarters. The future looks bright."

I couldn't say it better. What I can add, however, is a suggestion of what the future might bring.

In my opinion, Illumina is shaping up to be a key player (perhaps THE key player) in the genetic medicine era, in much the same way that Microsoft became the linchpin of the desktop computer era.

(A linchpin, by the way, is a metal part used in mechanical engineering to prevent a wheel or other rotating part from sliding off the axle. Without it, things fall apart.)

When the desktop computer era started, remember, no one imagined where it would bring us. But investors who saw Microsoft as a key player, and had the courage to buy the stock and the patience to hold it, did very well.

Today, similarly, no one knows where the genetic medicine revolution will take us. But I can promise you this. The price of the technology will come down, down, down. The intelligence gained through genetic medicine will continue to increase. And then what?

Personalized medicine? A cure for cancer? Longer lives? Designer babies? I'm not very good at imagining things, but I am very good at seeing parallels and making connections, and I feel strongly that Illumina, whatever the future of genetic medicine, is going to be a far bigger company in the future.

Fundamentally, the business looks terrific. In the third quarter, revenues grew 82% to $97.5 million, while earnings shrank from $0.42 per share to $0.34 per share (the decline due mainly to stock-based compensation charges). Projections for 2008 are earnings of $1.24 per share, up 57% from 2007.

Looking at the stock's chart, here's what I see.

First, there's a major long-term uptrend running from the market's 2003 low to the present. Most recently, the stock tested resistance at 60 for a three-month period from September through December. Then the news of the settlement with Affymetrix came, and the stock zoomed from 60 to 75. Since then, it's retreated to 64, in the process touching its 25-day moving average. To me, it looks like a decent buying zone.

Of course, the broad market is still unsupportive, so conditions are far from ideal. But at least put this one on your watch list. I expect you'll be hearing about it again.


Editor's Note

Illumina may never be mentioned here again, but it has appeared in Cabot Top Ten Report eight times in the past three years, and it is currently monitored in every issue. If you'd like weekly guidance on investing in the market's strongest stocks, as well as ongoing advice on when to buy, hold and sell those stocks, I suggest you try a no-risk trial subscription to Cabot Top Ten Report. To get started, simply click the link below.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Timothy Lutts can be found on Google Plus.

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