Genetic testing designed to identify all sorts of potential diseases, conditions and potential maladies is a field that's held both promise and disappointment for many biotech companies over the years.
Fits and starts are common in the space, and approval from government agencies that regulate the sector is hard to come by. So, when an established company in the industry does get that coveted approval, you had better take notice, as it can mean some big profits for traders willing to take the ride.
In the case of genetic test maker Affymetrix (AFFX), the stock is riding high courtesy of the latest approval from the U.S. Food and Drug Administration. On Friday, the FDA authorized marketing of the company's CytoScan Dx Assay, a test that's designed to detect chromosomal variations in children that may be responsible for developmental delays and other intellectual disabilities.
The Affymetrix CytoScan DX can analyze a blood sample and scan the entire human genome to detect both large and small chromosomal changes. This is significant because many developmental disabilities such as Down syndrome and DiGeorge syndrome are thought to be associated with chromosomal variations.
In the FDA's own press release approving the Affymetrix test, Alberto Gutierrez, Ph.D., director of the Office of In Vitro Diagnostics and Radiological Health, said this new tool should help "health care providers and parents to intervene with appropriate care and support for the child."[More from ProfitableTrading.com: Popular Retailer Could Make a 10% Run in the Near Term]
For AFFX, this news represents the latest positive development driving traders into the stock.
On Jan. 7, shares jumped 11.5% in one session after the company issued preliminary Q4 revenue guidance. Affymetrix said that it expects fourth-quarter revenue to come in at $91 million. That positive metric was well above the consensus estimates for revenue of just $83.2 million in the quarter.
The positive preliminary guidance prompted analysts at Maxim Group to reiterate their "buy" rating on shares, and to also raise their price target to $11 from $9.[More from ProfitableTrading.com: Medical Device Maker Could Surprise Analysts With a Quick 20% Gain]
Affymetrix still has about two more weeks before the official fourth-quarter numbers are released, as the company is slated to report on Feb. 5. I suspect that the positive combination of what should be a strong quarterly report and the new approval of the CytoScan DX Assay test will cause money to continue flowing into the shares for the next two to three weeks, and likely well beyond.
With the shares now trading just below their 52-week high, I think the momentum is with AFFX, and that means the shares could be primed for another big leg higher. If the Feb. 5 release comes in slightly better than expected, traders who take a position at current levels could be well rewarded.
Recommended Trade Setup:[More from ProfitableTrading.com: Double-Digit Rally Looks to Be in Store for This Casino Stock]
-- Buy AFFX at the market price
-- Set stop-loss at $8.60, approximately 8% below recent prices
-- Set initial price target at $10.70 for a potential 15% gain in three weeks
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