The Money Tree

Safely Generating Income in Retirement

MYGN – An Update

Posted by mounddweller on May 7, 2010

Well everyone it looks like MYGN has went from a short-term trading opportunity to a long-term investment.  However, given the conservative approach taken in selecting MYGN as a trade, I have no qualms in holding it longer term. 

Let’s quickly review why I originally bought MYGN and why I don’t mind holding them through this rough patch:

(1) outstanding balance sheet – $3.58/share in cash and ZERO debt.  At current price around $17.50, cash on hand is 20% of the market cap.

(2) excellent income statement – net profit margin is > 30% (note: they recently cut earnings forecast so this may drop a little, but it could be cut in half and still be a great number)

(3) excellent cash flow – operating cash flow > 30% and levered free cash flow > 10% of revenue

Now, an update on what’s happened to put the stock on the “1/3 off” sales rack:

(1) March 30 – Company lost a court case regarding the validity of its patents on genes used in its breast cancer susceptibility tests.

(2) May 4 – Company announced 1st quarter earnings.  Revenue only grew 5%.  However, that wasn’t the bad news that sunk the stock price.  It was the lowering of forecasted annual earnings of $1.30 to $1.35 that did that.  Previous guidance had been around $1.50/share.

(3) The overall market has gotten a recent haircut as well.

Combined these three events have knocked MYGN for a loop.   However, I think the market is being short sighted.  First, the verdict on the patent case is already being appealed.  It will be many years before a final decision is made regarding the legality/morality of patenting human genes.  Second, the reduced 2010 full year forecasted results aren’t that bad.  The company still expects growth in excess of 50% over last year!  Finally, last but not least, the current market weakness will pass.  

Now, finally a quick update on my current position in MYGN.  As you’ll recall on 3/29 I bought 300 shares at $24.68/share.  I then sold the APR $25 calls for $0.55.  These expired OTM.  Then, on 4/27 I sold another round of MAY $25 calls at $0.60.  This makes my current net cost $23.53.   Barring a huge rally in the next two weeks these too should expire OTM. 

I now have a decision to make.  Do I try to lower my cost basis by selling OTM NPs  or after MAY expiration do I begin selling CCs below my current net cost?  Time and overall market conditions will determine which will be the best course to follow.

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