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Exact Sciences: Revolution in Colon Cancer Screening

Exact Sciences has nice big picture outlook.

The market’s longer-term and intermediate-term trends are pointed up and the broad market is improving. Thus, we remain bullish, notes Mike Cintolo, editor of Cabot Growth Investor.

The question of new buying, especially among growth stocks, is a bit trickier for a few reasons. The Nasdaq has been underperforming all month and really hasn’t decisively taken out its prior (July) peak. And we’re not seeing a ton of low-risk set-ups.

That said, with the majority of the evidence clearly bullish, we don’t want to simply wait around for the perfect set-up, which rarely happens.

Thus, we’ll split the difference and take a further baby step into the market — we’re buying a half-sized position of Exact Sciences (EXAS) in the Model Portfolio.

We’ve been following this stock off and on for a few months. There’s risk here, as it’s basically a one-product company, but that product looks potentially revolutionary.

Exact’s Cologuard colon cancer screening test (which uses DNA from the stool) is non-invasive and can be done from the home (both of which dramatically boost customer compliance compared to colonoscopies) and has proven to have solid results in detecting early-stage colon cancer, which is very treatable.

There have been some short sellers swarming the stock this year (short interest is about 10 times the stock’s average daily volume!).

But that hasn’t stopped some big insurers from signing on (235 million people now have insurance coverage for the test) or from more doctors ordering it (81,000 physicians have now ordered the test at least once, up from 70,000 one quarter ago).

In the second quarter, 135,000 Cologuard tests were completed, up 149% from last year, which drove revenues up 172%.

Exact Sciences is still losing money as it ramps capacity and boosts its marketing efforts (including a successful nationwide ad campaign), but the big picture is huge, as management believes it has just 2% of the colon cancer testing market.

As for the stock, it hasn’t had a deep pullback in a long time, which is a bit of a worry, but mutual fund ownership is surging (438 owned shares at the end of June, up from 265 a year before).

Meanwhile, EXAS hit a new price and relative performance (RP) line peaks earlier this month and the stock has tightened up since.

We’ll start with a half position now (half the dollars you’d normally invest and look to buy the other half if we develop a decent profit).

Michael Cintolo is vice president of investments and chief analyst of Cabot Heritage Corporation.

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