On the grand scale, Illumina, Inc. (NASDAQ:ILMN) offers a very intriguing business model. The company’s genetic and biologic analysis tools are a smart choice for an aging baby-boomer population when it comes to analyzing diseases and disorders, and mapping out personalized treatment plans for these individuals. It’s no secret that our baby-boomer population is going to boost health-care spending dramatically, making Illumina a company that should benefit in a big way, perhaps five to 20 years down the road.
In the meantime, though, Illumina, Inc. (NASDAQ:ILMN) could face a bigger challenge. Like its primary rival Life Technologies, Illumina relies on hospitals, universities, and independent laboratories to buy its genetic analysis tools. Unfortunately, these are the same institutions that rely on government grants to help fund a portion of their research. If you hadn’t noticed, with the sequester automatically kicking in, the Federal budget has needed to be reduced by $85 billion. Among the areas that could see these cuts are medical-research programs. So, while growth may continue for Illumina, the magnitude of its growth over the coming two-to-five years may be slower than many investors are accounting for as the U.S. government does its best to pare back its deficit.
At a forward P/E of 41, and at nearly eight times sales, I just don’t see where investors have left room for any more value to be squeezed out of this stock, and would suggest you pass on the company here.
Home is where the short-seller is
There’s little denying that banking stocks are fickle, and that they often follow the path of the economy. However, I hold pretty true to the old adage on Wall Street that you buy banks when they’re notably below book value, and you sell them when they top two times their book value. It’s not a perfect science by any means, but it helps to weed out undervalued and overvalued banks from the crowd. Joining Nokia and Illumina, Inc. (NASDAQ:ILMN) in the “sell” column this week is Arkansas Home Bancshares Inc (NASDAQ:HOMB).
I will give it to shareholders that they have a lot to be excited about right now, with their company purchasing Liberty BancShares for what amounts to $30 million in cash, and $250 million in Home Bancshares Inc (NASDAQ:HOMB)’ stock. The merger will boost Home’s deposit market share and make it the second-largest holding bank based in Arkansas.
With that merger, I’d expect that its price-to-book-value will dip a bit, as well. But, at a current P/B of nearly three, and a forward P/E of 17, I’d have to say that emotions are getting the better of sensible investing lately.
In the second quarter, Home Bancshares Inc (NASDAQ:HOMB) did deliver great news: It provided an average return on assets of 1.71%, and a 53-basis-point boost in net interest margin that’d make most banks drool with envy. But, at least some of those gains are one time in nature, and relate to additional yield received from FDIC loss-sharing loans. Looking ahead, I see some very difficult year-over-year comparisons for Home BancShares, especially as interest rates rise and consumer loans dry up (mortgage lending income accounted for 16% of all non-interest income), and would suggest investors look for more intriguing values in the banking industry.
