On January 11, Illumina (ILMN) told analysts at the annual JPMorgan Chase healthcare conference to expect 39% sales growth for 2021 when the company reports earnings on February 10.
And that analyst earnings and revenue forecasts for 2022 were too low. Sales would grow by 15% in 2022, Illumina said. Analysts had projected that sales would grow by 11% in 2022. Earnings in 2022 could range between $4.00 and $4.20 a share.
The news sent Illumina shares up 16.98% that day. (The stock gave back 2.46% as of the close today, January 12.)
No doubt that the news was good but the size of the jump tells me a couple of important things about this market.
First, fears of falling sales and earnings growth rates are greater than many investors appreciate. The size of the move up on positive guidance for 2022 is a result of fears that Illumina will show a big slowdown in growth in the December quarter–right now the analyst projection is that the company will earn 50 cents a share versus $1.45 in the December quarter of 2020. And that the drop in growth won’t be just a one-time result of the Pandemic pulling sales forward (in Illumina’s case) or back, but of a fundamental decline in growth going forward. Those fears are increased for high multiple growth stocks (and Illumina trades at 68 time trailing 12-month earnings per share) that are showing a pattern of declining positive earnings surprises. Illumina beat analyst projections by almost 17% when it reported last quarter, but that followed on surprises of 38% and 39% in the two prior quarters.
Second, those jitters about earnings and revenue growth mean that any stock that can deliver strong growth to refute those fears is likely to get rewarded big time. The 17% jump in Illumina’s share price yesterday was a result of the combination of fears and the refutation of those fears. Obviously all you have to do to show incredible profits in this market is to find stocks where investors worry about future growth rates and that are about to deliver big positive guidance surprises. (You know the expression “From my lips to God’s ear?)
I continue to hold Illumina in my long-term 50 Stocks Portfolio because the dominant maker of equipment and supplies for gene sequencing continues to see its market expand with the increase in genomic testing for new diseases (estimates call from the increase in the company’s target market to 2 billion people by 2026 from 1 billion today) and, significantly, the increasing acceptance of reimbursement for genomic testing by government and private insurance. Finally, the current Pandemic looks like it will lead to a big increase in spending for global surveillance for new infectious organisms. Illumina sees $165 billion in the next decade being spent on such surveillance programs.
The stock is likely to continue to be extremely volatile. The shares traded at a high of $524 on august 16, 2021 before falling to $347 on December 3. They closed today, January 12, at $413. This would seem to be a very good candidate for a long-term program of dollar cost averaging.
The stock has been in my 50 Stocks Portfolio since June 16, 2020. The position ip 16.46% as of the close on January 12, 2022. The stock has ranged from $292 to $524 during that period.