Why I Bought Illumina

Wednesday on twitter, I "tweeted" that I was most likely going to get long Illumina (ILMN), and that's exactly what I did. If you haven't noticed, there's been a big rotation into healthcare/biotech/bioscience companies as of late. I already have exposure to this somewhat through Gilead (GILD), Biiogen (BIIB), and Thermo Fisher (TMO). But, the positions are smaller relative to my overall portfolio. So, I wanted to increase my exposure there while still maintaining diversification in the various health/bio sectors. In this market, you play what's working.

Taken from Google Finance:

Illumina, Inc. develops, manufactures and markets integrated systems for the analysis of genetic variation and biological function. Using its technologies, the Company provides a line of products and services that serve the sequencing, genotyping and gene expression markets. The Company’s customers include genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations and biotechnology companies. Its tools provide researchers with the capability to perform genetic tests needed to extract medical information from advances in genomics and proteomics.

Straight up, ILMN scares me - I'm not kidding. Its valuation is ridiculous and borderline insane. It has a trailing P/E of nearly 160 and a forward P/E of 41. However, this name continues to cruise higher and has had me interested for a while. We finally got a pullback to support and I pulled the trigger. I am keeping a very tight stop on this name for fear that it could have its head chopped off at any minute due to its sky high valuation.

click to enlarge

As you can see from the chart above, ILMN has pulled back from $90 to around $82 or so in an orderly fashion. That 82 level has served as a nice little area of support recently so I figured to start my buying here. The main level of support I'm concerned with though is below that at $80. As you can see, ILMN bumped up against 80 from April until early June as that area was extreme resistance. Now that ILMN has blown past that resistance, I am ultimately looking for the re-test of this area as it now should be support. At that level, I will add handsomely to my position.

The $80 level is also key simply because it is also right below the 50-day moving average and serves as my stop loss. If it cannot hold this big area of support, it is going lower and I want out fast. Again, the valuation scares me and it could come crashing down with no explanation. I want in this name for fundamental reasons (not valuation) because the company is really progressing and gaining a lot of attention/support.

However, in this increasingly volatile market, you really have to make sure you're focusing on risk management. Managing your risk/reward is half the game in this whacky market. The chart has presented me with a clear exit plan and I'm comfortable getting into this name because the price action is pretty crisp and I've got a clear game plan to manage my risk.

Therefore, I'm in with my initial position at $83.xx and a big order around $80 and a very tight stop below that at $79. This is not a trade - it is an investment. It simply looks like a trade due to the very tight stop I have on it due to lofty valuations and a volatile market. People who are just buying and holding in this market are most likely being slaughtered. You've got to adapt and maneuver around positions to ensure that at the very least you're preserving capital, if not growing it.

Disclosure:  The author is long ILMN.