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Pacific Biosciences of California (PACB)

Today’s recommendation is a speculative medical technology company from The CHEAP Investor. As Editor Bill Mathews notes in his recommendation below, this stock is in a long-term downtrend. It’s also fairly small ($100 million market cap) and priced under $2, which can increase volatility. In short, this isn’t a stock for...

Today’s recommendation is a speculative medical technology company from The CHEAP Investor. As Editor Bill Mathews notes in his recommendation below, this stock is in a long-term downtrend. It’s also fairly small ($100 million market cap) and priced under $2, which can increase volatility. In short, this isn’t a stock for the impatient or the risk-averse. That being said, if you like to invest a portion of your portfolio in high-potential speculations that could double, triple or more, Pacific Biosciences of California (PACB) is just that kind of stock.

The company’s primary product is a DNA sequencing machine called the PacBio RS. According to Pacific Biosciences, the PacBio RS has several advantages over other DNA sequencers, thanks to its SMRT (for Single Molecule, Real-Time) technology. Not being a geneticist myself, I can’t claim to understand the technology, but according to PacBio’s website, it provides more information and more detail than other sequencers, and is also faster. You can read more about the PacBio RS and SMRT technology yourself here, if you wish. Or, you can just keep reading for The CHEAP Investor‘s analysis of the stock.

“By providing access to genetic information that was previously inaccessible, Pacific Biosciences of California (PACB) enables scientists to increase their understanding of biological systems. Pacific Biosciences is one of those stocks where institutional investors invested heavily in an IPO, and then the price plunged into the territory where we think it’s a great buy. It went public on October 27, 2010, raising $200 million at $16 per share, and rose to an all-time high of $17.47 that day. After that, the stock has been in a relatively steady decline. Now that the stock has fallen 80% from that high, we think it could be an interesting speculation.

“The company has an excellent balance sheet with $161 million ($2.90 per share) in cash, book value of $3.02 and total debt of just $2.9 million. Insiders own 35% of the 55 million total shares outstanding, and 56 institutions own 46% of the float. Institutions have purchased 7.8 million more shares than they sold for the quarter ended March 31, 2012. The two major negatives are that the company lost $27 million last quarter (which was better than the same quarter a year earlier), and that the stock’s price is in a downward trend. ...

“During the first quarter of 2012, the company recognized revenue from installations of its PacBio RS systems, SMRT cell and reagent consumables, instrument service contracts and grants. Revenue totaled $10.0 million for the quarter, compared to recognized revenue of $12.4 million for the fourth quarter of 2011. Net loss for the quarter was $27.6 million compared to the $22.8 million net loss recognized during the fourth quarter of 2011. ...

“PACB is definitely speculative. However, we like $2.90 per share in cash and $3.02 per share book value. The company’s system revenue backlog totaled approximately $4.7 million as of March 31, 2012, which represents orders for seven PacBio RS instruments received as of that date. The backlog of seven instruments reflects the 16 instruments in backlog as of December 31, 2011, 11 installations and two additions during the first quarter. If the company continues to grow its revenues and cut its losses, it has the potential to perform well. There are a lot of institutional investors betting on this company at much higher prices. Buy Recommendation.”

- Bill Mathews, The CHEAP Investor, August, 2012