DermTech (Nasdaq: DMTK) scares off some investors because of its volatility – and because it’s simply not an established steady grower. But for those who can handle the risk, it offers great long-term growth potential. The company has developed and combined two genomics tests for detecting melanoma, now marketed as the DermTech Melanoma Test. With these tests, an adhesive patch is placed over a suspect area of skin. The patch is then removed and sent to DermTech’s lab for genetic analysis.
Current methods of diagnosis involve obtaining a tissue biopsy and sending it to a lab for histological analysis, but they’re 17 times as likely to miss a melanoma diagnosis as DermTech’s tests. The cost of DermTech’s genomics testing is also more than 40% lower than the current approach.
It’s still early for DermTech. The company needs to get more dermatologists to use its tests and more insurers to cover them. It’s working on that, and aiming to launch new products over the next few years, too.
With DermTech’s market cap recently just above $1 billion, this stock seems to have a lot of room for growth, possibly delivering a 100% or higher return over the long term. (The Motley Fool owns shares of and has recommended DermTech.)
Ask the Fool
Q: A company in which I’m invested has announced a “secondary offering,” and shares dropped some after the announcement. Is this bad news? – C.F., Batavia, New York
A: Not necessarily. To start, understand that an initial public offering, or IPO, is when a company first issues shares that will trade on the public market. At the IPO, the company receives money from selling these shares. Afterward, when shares are bought and sold between investors, the company doesn’t participate in or profit from those trades. A secondary offering is when the company offers additional shares on the open market at a later date.
There are two main kinds of secondary offerings. In one, the company seeks to raise more money, so it creates and sells more shares. That can help the company, which can be good for shareholders. But it can also hurt shareholders because creating new shares dilutes the value of existing ones. Imagine a pizza: If it’s cut in four equal pieces and you own one, you own a quarter of it. But if it’s suddenly cut into eight equal pieces, your piece of the pie is now smaller.
Another kind of secondary offering is when shares that already exist are sold into the market. Insiders or private equity firms, for example, may own millions of shares, and will occasionally sell some to raise money. This doesn’t dilute existing shares’ value, though it might indicate pessimism on the part of an insider.
Q: What’s the “big board”? – S.L., Bremerton, Washington
A: It’s how some people refer to the New York Stock Exchange, America’s oldest, which was created by 24 businessmen gathered under a buttonwood tree on Wall Street in New York City in 1792.
My dumbest investment
My dumbest investment was buying shares of Novavax out of a fear of missing out. It promptly headed south. It was only a small position, but I’m keeping it in my portfolio so that it can either recover or stay low to remind me not to follow the herd. – S., online
The Fool responds: It’s easy to see where your fear of missing out came from: The stock began 2020 as a tiny company with a market value near $100 million and a share price around $4. By mid-August 2020, its share price had soared above $155.
What was going on? Well, the company had a well-regarded flu vaccine, NanoFlu, on the path to approval by the Food and Drug Administration (FDA), and its entry into the race for a COVID-19 vaccine sent shares soaring.
Those buying into the company when you did were largely speculating, because its stock was priced as if it already had a COVID-19 vaccine approved by the FDA and selling briskly in the market. Such investors could do well if those events come to pass, but there’s no guarantee they will. We hope you still have your shares, as they more than doubled in value since you wrote us last year.
Novavax remains speculative, but it will be less so if NanoFlu wins FDA approval – and an eventual approval for a COVID-19 vaccine would be icing on the cake.
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