Genetic Gains? Affymetrix (AFFX) and Illumina (ILMN)

"Not only has the biotech sector as a whole demonstrated much better relative strength than many of the other major indices over the past several months (suggesting the group as a whole is likely to outperform if the market does begin to rally in earnest), we find each of these stocks attractive based on their own merits as well.

"In the case of Affymetrix, the stock has been crushed over the past couple of years due to the fact that management has struggled to provide reliable guidance on a regular basis, and thus the stock is now trading near a multi-year low.

"However, despite the fact that Affymetrix's stock has been so brutally punished, we continue to believe that the company is far from 'out of it' when it comes to re-capturing market share in this still fairly young (and still growing) industry.

"If the stock was trading at $45, we might have a different opinion, but at current prices, the company has a market capitalization of just $350 million.

"And based on what could happen to Affymetrix's income statement if the company is able to get just a few of the pieces of the puzzle to fall into place, we believe this valuation is much too low (and thus the stock currently represents a great investment opportunity from a risk/reward standpoint).

"From a technical standpoint, while it is clearly still too early to say a new uptrend is underway at Affymetrix, I am very pleased with its recent chart pattern.

"The stock gapped down in early July and is now showing exactly the sort of pattern we would hope to see if we were looking for confirmation that a new bull market may be getting underway for the sector.

"No, history does not always repeat itself, but based on where the stock appears to be in the ongoing 'fear/greed' cycle for investors, we feel fairly confident that if the stock is able to clear $5 on good volume in the weeks ahead, it will be a signal for you to start adding more.

"At the other end of the spectrum, we have Illumina.

"As mentioned above, a lot of the trouble Affymetrix has experienced over the past couple of years has been the result of absolutely brilliant execution by Illumina's management team in the marketplace... and as a result of this stellar effort, Illumina's stock is now hitting new all-time highs rather than multi-year lows.

"Of course, with a higher stock price comes a higher valuation (currently $6 billion), and thus it is much harder to describe Illumina as a "bargain" the way we were able to make that claim with Affymetrix.

"However, what Illumina lacks in the risk/reward ratio from a valuation standpoint, it more than makes up for in the risk/reward profile of its management team and technology base.

"There has been no major news to report out of Illumina lately, but the company's stock has continued to trace out a pattern that history suggests has a very good chance of resolving itself with a significant move to the upside... and with the biotech sector as a whole appearing to be gearing up for a move higher, we believe any breakout in Illumina's stock will likely be a strong one.

"On a valuation basis, Affymetrix may be the better investment, but from a momentum standpoint, Illumina is clearly "the horse to ride" at this stage of the game.

"So why not buy both on the assumption that you probably only need one to work out in your favor in order to come out ahead – and if both work out (which we believe is the most likely outcome at this stage of the game), you'll be 'golden,' as the saying goes.

"I added a few more shares of both stocks to our models portfolios. AFFX is considered a strong buy under $4 and a buy under $6.ILMN is considered a strong buy under $44 and a buy under $48."

Steven Halpern's TheStockAdvisors.com offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.