In this episode of Industry Focus: Wild Card Wednesday, Dylan Lewis and Brian Feroldi take a deep dive into Semler Scientific (OTC:SMLR), LeMaitre Vascular (NASDAQ:LMAT), and Fulgent Genetics (NASDAQ:FLGT). Semler Scientific has a revolutionary new device with high accuracy and low cost that can change the diagnostic industry. LeMaitre Vascular's unique business model allows it to deliver consistent growth for investors. Fulgent Genetics does genetic testing to diagnose or rule out genetic conditions.

We take a look at their past performance and how they are poised to grow in the future and why we want to recommend them to you. At the end of the podcast, we take on some of the listeners' questions and feedback.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 12, 2020.

Dylan Lewis: It's Wednesday, February 12th, Wild Card Wednesday. And we're talking small-cap healthcare stocks. I'm your host Dylan Lewis, and I'm joined by "the slightly better than just OK" Brian Feroldi. It's a little callback to an episode we did a little while ago, Brian.

Brian Feroldi: Yeah, thank you for that wonderful introduction.

Lewis: I love -- we were going over preparing for the show and you mentioned that one of your friends addressed you as, "The just OK Brian Feroldi," after I gave you that glowing introduction as a joke a few weeks back. You are far better than "just OK, Brian."

Feroldi: I mean, slightly better, as you just said. So yeah, let's stick with that.

Lewis: Well, I'm happy to have you on today. We've been getting a lot of notes from listeners saying that they really missed the healthcare show, and as we've talked about a couple of times when we're doing some of the feedback discussion; "We want to make sure that we're lined up with folks that can consistently contribute to the show and put people in a position where they're getting great information." This is a great way for us to drop some healthcare stuff in, because you love the healthcare space, Brian, and I'm eager to learn a little bit more about it. So that's kind of the tempo that we're going to take with today's show.

The listeners have spoken, they want healthcare stuff, today they're going to be getting it, specifically, smaller healthcare plays. And we're looking at three companies in the sub-$1 billion healthcare space. The first business that we're talking about is Semler Scientific. What's the deal with them, Brian?

Feroldi: Yeah, so, I love to research and find the small, underknown companies and bring them to our listeners' attention. So Semler Scientific, their ticker is SMLR. They are about a $320 million-market-cap business. And what they focus on is diagnostic products for people who are at risk of having a heart attack or stroke. Specifically, they make a device that helps to diagnose peripheral artery disease, PAD, which is when the arteries in your body become narrowed due to progressive buildup of fat, and that can lead to all kinds of problems. And PAD is an extremely common condition. You're talking about tens of millions of Americans that have it. And if you have PAD, you're more than 4 times more than likely to die of a heart attack and 2 to 3 times more than likely to die of a stroke.

That sounds bad, but the big problem here is that 75% of people with PAD do not know they have it, and that translates into about 12 million Americans. So what Semler does is they make an easy-to-use device that helps to diagnose PAD far more easily and efficiently than it is today.

Lewis: And that's where, it seems like, a lot of these healthcare companies are really able to carve out a good space for themselves. I mean, kind of the same goes for tech, where if you're able to come up with something that's a little bit more efficient, kind of an easier way of doing something, especially if you can reduce the amount of treatment time or the amount of pain that a patient has to go through, there's a good market for those types of devices.

Feroldi: Yeah, exactly. And especially when you see a disease that is so common and so underdiagnosed, if you can come up with a way to do that better than the current standard of care, you have a tremendous opportunity ahead of you. So what Semler created was a device called QuantaFlo, which is a little tiny clip that goes on the patient's hands, on their fingers and their toes. It's very similar to an oxygen sensor for -- our listeners who've ever been to the doctor and the little clip goes on to measure your blood oxygen level. QuantaFlo is designed to measure the red blood cell flow to the extremities of the body. And the little clip goes on each of the extremities for about 30 seconds. And then the clip talks to Semler's software, which gives a printout of the patient's blood flow to their extremities in about five minutes.

And that is a real easy way for physicians to understand what the blood flow was like to each of the patient's extremities, and they can actually use that information to diagnose PAD. And from there, the doctor can actually take action and prescribe either lifestyle changes, drugs, or maybe even surgery in the more extreme cases.

Now, that is vastly different than the standard of care today, which is when a blood pressure cuff is put on one of the patient's extremities and that just measures blood pressure -- that doesn't measure the actual flow of blood to the extremities. The other problem is using a blood pressure cuff is usually done on just one arm, and PAD can actually happen in one limb but not in the other. And blood pressure cuffs are also not sensitive enough to actually diagnose a PAD early. So QuantaFlo is truly a revolution in helping to make PAD far easier to diagnose than the current standard of care.

Lewis: Listeners might be hearing this pitch and saying, "All right, Semler sounds like they're a device company, you know, is this what we're staring at here?" And the reality is, there's actually a pretty nice software business here for this company.

Feroldi: Yeah, that's what really excited me about this when I learned about Semler. So their business is not actually selling the hardware. Instead their business model is predicated on recurring revenue that's earned from the software. So they either sell the software license on either a monthly basis or in a variable-price basis based on usage.

So from the customer's perspective, that's highly attractive, because they don't actually have an up-front fee to get this technology into their office. The only thing that they're paying for is the ongoing usage of the software. And that's vastly different than the current arrangement that they have with the blood pressure cuffs, which can range in price -- believe it or not -- from as little as $2,500 to as much as $20,000. And blood pressure cuffs still require a special tech on site that has to be trained to use it. Semler's tool is so easy -- you can just put on your finger, start the software and you get the report out very quickly. So again this is a real step change in the diagnosis of PAD.

Lewis: If there was an Industry Focus drinking game, I think it would be anytime Brian Feroldi says "recurring revenue." I know that that's one of the main things that you like to look for in businesses, and that's really rubbed off on me as well. It really changes the dynamic, and it really makes a lot of these businesses so much stickier. I think their idea there is so brilliant, because the up-front investment that these offices have to make in very expensive medical equipment can be tough to justify sometimes. You know, you want to make sure that your patients are getting great care, but to lay out tens of thousands of dollars for a device can be a little steep for some of these offices.

Feroldi: Yeah. And the other big advantage here is really the time savings. I mean, when you're in the doctor's office, every minute counts. I mean, you're already so compressed with the number of things that a doctor wants to go over with you in such a short period of time, the fact that this device can be used by, first off, someone that's not trained and second off in 5 minutes versus 15 minutes for the traditional methods, that's a game changer.

Lewis: One of the other, really, appealing things about this business, or I guess one of the appealing elements of this business because they have this software arm to them, is the fact that they look a lot more like the software businesses that we tend to talk about on the Friday tech show when it comes to their financials.

Feroldi: Yeah. When you look at this company's financials, despite it being basically a $300 million company -- I mean, my jaw almost hit the floor when I saw some of these numbers. So this company is still teeny tiny. Their revenue in the most recent quarter, which was Q3 of 2019, was $8.9 million. So very small. However, as you just provided, this is almost like software company margin. So their gross margin, on just $9 million in revenue, is 88%. And that is actually so high and this company is so lean -- they just have about 46 employees in this whole company -- that they actually produced $3.1 million in adjusted net income on just $9 million in revenue. So you're talking about a company that's generating a significant amount of margin on very little sales. That's super exciting.

Lewis: And their near profitability at -- or you know, depending on if you're looking at the adjusted or the GAAP -- already profitable on an adjusted basis, with 60% growth. Usually, the trade-off that you have to get here is, if you're going to pay for high growth, you're going to have to wait for the income to show up. This is a company that seems like they're well on their way to making that happen.

Feroldi: Yeah. And management doesn't think that this is the end of it either. They've called out specifically in their conference call, that they intend to continue to grow revenues at a faster rate than their expenses and they have a very firm plan in place to remain profitable. So it's even possible, despite already throwing off great margins, that this number can actually be better. And just to go backwards to your point, when I said, "adjusted that income," I actually adjusted that downward, because they had a tax benefit that made it seem like their net income, their GAAP net income, was actually a few million dollars higher than that. So this isn't a case where we're talking about adjusted net income, but they're really operating at a GAAP loss; it's the opposite here.

Lewis: Oh, wow! So I thought you were throwing some fun-with-numbers math at me. The reality is, you were, but they were conservative fun with numbers. I appreciate that, Brian. We typically don't talk about companies that are this small -- and I think there are some unique elements to it that we should probably dive into a little bit. But when I see a company that is sub-$500 million, I look at it and say, "You know the management of that company is a lot more important, because they're going to have really outsized effects on the direction of the business."

Feroldi: Yes, completely. That can be a trouble. And again, this company has 46 employees, so literally every employee at this company is [laughs] basically critical, but that is doubly true of the management team, simply because they -- with so few employees and such a small structure, you don't have a deep bench if somebody was to go down. So their CEO has been with the company for several years, and the actual founder's son, I believe, is involved at the company as well. And the nice thing, talking about small companies is, often you get large inside ownership positions in this company. So the CEO here actually owns more than 12% of the business. And the founder's son actually owns about 9% of the business. So that's actually really impactful, really high inside ownership percentages. That really gives me comfort, as a potential shareholder, to know that if they win, I win; and if the stock price doesn't do well, they lose even more than I do.

Lewis: I think one of the other major points to note with this stock is, you know, we talk a lot about companies that trade on the NASDAQ or the New York Stock Exchange. These are very well-recognized stock exchanges, they are very liquid markets, you have a lot of participants that are there. This is a stock that trades over the counter or OTC, so it is not on one of the major exchanges. It's slightly less liquid. And if you look at the stock chart on a five-day basis, you're going to see some weird price movements and probably see a wider spread between bid and ask if you ever go to buy shares of this business. Not to say that you shouldn't invest, but it's just understanding where this stock is currently being traded and also some of the impacts that come with that.

Feroldi: Yeah, that's an excellent point. When you're dealing with smaller companies, liquidity can sometimes be more of an issue. Now, the good news is, as individual investors, we're often investing hundreds or thousands of dollars. So getting your position filled is usually not a big problem. That's more of a big problem for the mutual funds and hedge funds of the world that are investing millions of dollars at any given time. But to your point, yes, the share price movement can be far more erratic simply because the trading volume is so much lower.

Lewis: Yeah, we have to be responsible, right, we have to talk about these things, Brian. That said, though, there is some interesting greenfield ahead for this business. They have some pretty rosy ideas of what their total addressable market is. We've talked before about how TAM, that TAM number, can sometimes be a little fraught, can sometimes be a little inflated, but it seems like in their case, they're still so small, and there's still a pretty sizable market in front of them.

Feroldi: Yeah, again, they basically believe that their technology is so useful and so radically different than what's out there that they believe that they could ultimately be used to diagnose about 80 million Americans [who] should be screened using their device annually. They haven't called out how many have been screened with QuantaFlo so far, but the logical conclusion that is actually a pretty small number given that their revenue per quarter is about $9 million. And they also called out that about 300,000 doctor offices could eventually be adopters of their technology; again, just in America.

And one big thing that's going in this company's favor right now is, the reimbursement landscape in America is gradually shifting away from a fee-for-service basis and are going more toward a wellness-and-prevention basis. That plays right into this company's hand, since they're so focused on the diagnosis of an undiagnosed disease. And that allows physicians, once they have that data, to take action before a heart attack or stroke would occur. So this plays right into that trends hand.

Lewis: Yeah, I usually like to scrutinize that TAM figure a little bit, just because businesses can kind of get a little carried away with it and use it to tell a really great story without a lot of accountability. And I think that 80 million number is a faraway number for them. What I'm really impressed by, though, is the go-to-market strategy that they have of focusing on the service side of it and a little bit less on device revenue makes achieving that kind of scale a lot easier. You get over a lot of normal friction points that you would run into by going that route.

Feroldi: Yeah. And again, they don't call out their exact customer number, but as we're about to talk about, one of this company's big risks and one risk that is common of smaller companies is that this company actually has a significant amount of business that is just in the hands of a few customers. So this company's three largest customers in the most recent quarter accounted for 47%, 16%, and 13% of revenue. That is significant customer concentration. So that is actually a big risk related to this stock. On the other hand, it does showcase that they've probably only tapped a tiny fraction of that 300,000 offices that are out there.

Lewis: Yeah. And these are kind of the eccentricities that you're going to run into when you look at smaller businesses, you know, they're not going to have the build out bench of customers. If we were looking at a $10 billion business and said, "47% of their business comes from one customer," you know, that's a single-point-of-failure issue where if they decide to go and make their own private solution or go with another vendor that's going to be a big problem for them. They're small enough that they can come back from it, it would hurt them short term. But if their market is as big as they think it is this is something you just have to accept in the short term.

Feroldi: Yeah, exactly. And as they grow and as they build out, that risk should gradually decline over time, but it is certainly, in my view, the biggest risk facing the company right now.

Lewis: We're big believers in "winners keep on winning," here at The Motley Fool. This stock has already performed incredibly well. It went public about six years ago, and I think it is up 7 times basically where they went public. So it seems like there's a lot of momentum and a lot of support behind this company. Certainly, seeing some of those gains, when it comes to their financials. Nice to see that the stock is following along as well too. With that, they're currently trading at about 35 times forward earnings. Given that 60% growth rate, Brian, I think that's pretty normal.

Feroldi: Yeah, I would say that that's a more than fair price to pay. And again, if listeners do dive into the stock more, they should, again, keep in mind that it does trade over the counter and that the share price will probably be erratic. But if you're focused on the long term, that shouldn't bother you one bit.

Lewis: All right. We're going to talk about our second small-cap healthcare stock, and that is, LeMaitre. And I'm going to spell it, because the way I pronounce it isn't going to really imply how it's spelled it's L-A-M-A-I-T-R-E. For those French fans out there, you can butcher my pronunciation of that or you can ridicule my butchered pronunciation of that, I should say. LeMaitre Vascular. This is a little bit bigger. They're about a $570 million company. Brian, what do they do?

Feroldi: Sure. So LeMaitre sells niche products that are used in vascular surgery. Surprise, surprise! And specifically, vascular surgery is surgery of the veins and arteries that are outside of the brain. Now, this is actually a pretty big market. So the way that LeMaitre insulates itself from competition is by focusing on niche product applications that are used in vascular surgery. So their products include grafts, shunts, tapes, catheters, clips, and even biologic products that are used to improve blood flow in the body.

And LeMaitre typically is, in the categories in which it competes, it is actually the No. 1 or No. 2 market share leader. And the way that it can do that, for being such a small company, is to, again, focus on markets that typically have less than $100 million in annual revenue. That's typically such a small number that it really reduces the competition, and the big companies in vascular surgery don't even bother competing, because even if they captured all of the market, it wouldn't be enough revenue to be needle moving for them. So that strategy has really paid off for this company over time.

Lewis: So the idea there is, we're going to aggregate a very large total addressable market by combining several smaller markets into one thing that's kind of grander and maybe enjoy some of the efficiencies of scale that come with having overhead in one business.

Feroldi: Yeah, completely. And for SaaS fans, this is a strategy that's AppFolio, one of my favorite software-as-a-service companies has employed with great success. And just digging into LeMaitre a little bit more. One thing that I liked about this business when I stumbled across it was that it's actually a family-run business. So the CEO is actually the son of the founder, who was himself a vascular surgeon, and basically decades ago wasn't happy with the products that were available on the market. So he hired an engineer to start building them for him. And because it's still a family-run business that is public, there is still substantial inside ownership here. So the CEO, George LeMaitre, owns more than 14% of the company. So again, as an outside investor, your incentives are really aligned with the management team.

Lewis: We're talking about some pretty gaudy growth rates earlier with our first stock. Slightly different story with this one, Brian. We're going to be ratcheting down our expectations a little bit. They did just under $120 million in revenue in 2019. So far more established than our first business. But that was only 11% year-over-year growth.

Feroldi: Yeah, this is not a company that's going to be a growth-to-the moon story. This is more of a solid, steady-Eddie slow-grower that just cranks out numbers that investors want to see. So for the year ahead, they're calling for basically 10% revenue growth and 17% operating profit growth. That's not the highest growth rate that we've talked about on the show before, but it's certainly enough to give long-term investors an attractive return.

And if you dig down into this company's income statement, you see lots of numbers that make me excited. So they're highly profitable, they are cash flow positive, they have a balance sheet that's stacked with cash, no debt. And they even pay a small dividend out to investors and also buy back stock. So investors who are interested in LeMaitre, this is the type of stock that will interest people that are looking for more of a conservative, well-run business that can just crank out consistent results as opposed to produce eye-popping revenue growth.

Lewis: Listeners that are following along might look at this company and be like, "Oh, that sounds pretty interesting. I'm going to search it and see how they've been doing over the last couple of months," as I did, when you're pitching the companies that you want to talk about today. And you can't avoid it, the stock sold off 20% in February. What happened there? Why is it now trading at a little bit of a discount to where it was a couple of weeks ago?

Feroldi: Yeah. They dropped pretty substantially when they reported earnings. They reported profits that were in line with estimates, but their revenue came in a little bit light. And the other issue was almost all of their revenue growth for the quarter was acquired, it wasn't organic; their organic sales were actually flat. Their margins also took a temporary decline because the company made two acquisitions last year that are temporarily pulling down their margins.

I view this sell-off that recently occurred [as] more of just a valuation reset. Shares were pretty expensive at the time, so the haircut certainly makes sense, given that they came in a little bit light. But they are calling, as we mentioned before, for double-digit top-line and bottom-line growth in the year ahead. And even after the haircut, this is not a dirt-cheap stock by any metric. So it trades at about 33 times trailing earnings and 27 times next year earnings. So it is more on the fully valued side.

But I wanted to call this to listeners' attention, because it's a very steady-Eddie, stable company, given that it's a sub-$1 billion market cap.

Lewis: I'm glad you did that breakout of the acquired and the organic growth. I think that that's something that kind of goes underappreciated when you're looking at these types of businesses. And just to kind of highlight why for a second. You know if the whole strategy for a business is "we are going to continue to be acquisitive, we are going to be bringing other products other brands into the fold" and their core businesses are not performing, they aren't growing, then you are only relying on acquisitions to provide top-line growth and really interesting prospects for investors.

And so ideally, perfect world, you're seeing good organic growth, and you're seeing that business make smart acquisitions. If not, they're going to be wholly reliant on those acquisitions, and they're going to have to continue to buy things. And the bigger the purchase, the more it's possible that something goes wrong. And so you always want to be careful with that kind of thing.

Feroldi: Yeah, that's completely true. And LeMaitre is very up front about that when they talk, on their calls, their stated goal is to grow their top line via new product introductions, gradual international expansion, adding on new sales reps, and steadily raising prices. So the acquisition piece is definitely a part of the thesis going forward. The good news is, this company does have a long track record of making successful acquisitions, and they only acquire products that are already on the market generating revenue. So they don't buy anything that's pre-FDA approval, which does help to lower the risk profile, but yes, that is something that investors need to know ahead of time.

Lewis: All right, Brian, our last company is another fun one to say, this is Fulgent Genetics. And I have to say, the healthcare space has a lot more creative names than you tend to see over in tech. In tech, we change and "I" to a "Y" or something like that to make it a little bit more fun, or add a "phi" to something. With healthcare, we got to get a little more creative.

Feroldi: Yeah. And we're not even talking about any experimental drugs or anything either, so these are just the company names themselves.

Lewis: So. Fulgent Genetics, again, we're going to be kind of going down into the smaller-market-cap space. This is just about a $300 million-market-cap company. What do they do?

Feroldi: Sure. So as the name implies, Fulgent is focused on genetic testing, and specifically -- so, for listeners that don't know, a genetic testing is when you take a sample of your blood or saliva and Fulgent runs it through its labs to look for mutations in genes or chromosomal abnormalities, which can be used to diagnose or rule out genetic conditions. And once you have somebody's genetic information, you can also predict their likelihood of developing a genetic condition later in life. And this information, when it's used properly, can actually be extremely helpful in guiding treatment decisions. And I know we've talked a lot in past shows about the future of healthcare and precision medicine, genetic testing is a key part of making that happen.

Lewis: I've always kind of thought about genetic testing and understanding someone's genome as basically looking at the roadmap of what might happen. And it's a little scary -- you know, I haven't gone through this process myself, still a little bit on the younger side and not quite there in terms of healthcare concerns. But I think it's something where you can be a little bit more aware of the things that could go wrong and maybe some of the proactive things you can do to get ahead of them or screen for them a little bit earlier.

Feroldi: Exactly. If you know that you are predisposed for certain things, then you could make certain lifestyle changes ahead of time to ward off bad things happening down the road. And most people are becoming more and more familiar with genetic testing today thanks to sites like 23andMe. While, that's more about what countries your ancestors lived in. What Fulgent is doing is more focused on the diagnosis of certain genetic conditions and the interpretation of that information to guide treatment options. So it's a completely different application than, let's say, 23andMe is after right now.

And Fulgent came across my radar because it was founded by a guy named Ming Hsieh, who is a billionaire. And he founded this company a few years ago to specifically go after rare pediatric diseases. So the genes that were causing these super-rare diseases. And that was only, you know, seven years ago when they launched their first test. They've expanded dramatically since then. So now they can actually diagnose more than 7,000 genetic conditions. And again, even though this is a small company in the grand scheme, that is actually thousands more than most of its competitors can do. So these genetic conditions include cancers, cardiovascular disease, neurological disorders, pediatric conditions. And this company continues to invest in R&D to expand the number of tests that it can look for.

Lewis: One of the things that I was most impressed with when I was looking over our notes for this is how far the cost of this testing has come down over the last couple of years. So it cost them over $500 to run a test back in 2016, down to about $180 now; that is ridiculous.

Feroldi: Yeah. And that's just their cost to actually run the test. The amount that they actually charge for the test has fallen actually even further. So again, in 2016, they charged $1,400 for a test. More recently, they now charge about $500. And the management team thinks that there's actually substantial room to drive those numbers down further. And the exciting thing for investors is, the lower the charge rate is, we're seeing actually a much bigger jump in the number of tests that are being ordered. So as the cost per test continues to decline, Fulgent is actually really well positioned to grow exponentially.

And for the investor, even though the amount that it's charging for each test is actually going down, since its costs are going down, we're actually seeing gross margin expansion here, which is wonderful.

Lewis: So I think one of the natural questions anytime we're talking about treatment or intervention or doing anything that's proactive for your health is, you know, where do the costs lie with a business like this. Is this something that's reliant on insurance, or is this something that people are tending to be paying out of pocket?

Feroldi: Yeah, one of the big barriers to broad-based genetic testing right now is that insurers are still not fully on board with this. So actually, the majority of Fulgent's revenue is coming from cash-paying customers. Now, that's good because it insulates them for reimbursement risk, but that's not good, because to really drive mass adoption, you are eventually going to have to get this through insurance companies. That is something that will be happening as the technology continues to evolve.

And one of the big reasons that insurance companies haven't covered genetic testing so far is that the results that have been produced haven't historically led to clinical action. So you can get the information, but if you don't know how to take action from there, the information isn't all that valuable. That is something that Fulgent is actively working on through machine learning to actually come up with clinical suggestions for how to change your lifestyle or what drugs are used to treat specific diseases. So that, combined with the lowering costs, should help to drive mass adoption.

Lewis: So for folks that were a little bit sleepy with our last stock and were looking for something that was high growth, they wanted their foot on the pedal, we're back there when we're looking at Fulgent. Some pretty impressive growth rates for this business: revenue up over 80% recently.

Feroldi: Yeah. And again, because we're talking about a pretty small company that even though revenue grew 80%, total revenue for the quarter was just about $10 million. And as we said previously, the cost that they're charging customers for the test is falling dramatically. So we actually saw testing volumes grow 270% during the same time period. So revenue growth is lagging testing volumes, but that's OK, because gross margin actually expanded significantly during this quarter and clocked in at 64%.

And, again, even though they're producing just $10 million in quarterly revenue, this company is actually producing GAAP profits. So their profits last quarter were $1.5 million. That's super impressive for such a small revenue number.

Lewis: One thing that I've been kind of thinking about with this business is, are these customers that they're bringing in, are these one-time customers, or are they able to establish a relationship with them and kind of build other stuff in? Because, you know, I don't know a ton about genetic testing, but I'd have to imagine that once you know what's going on in your body, you probably don't need an update for a while.

Feroldi: Yes. So that is a negative to the genetic testing market is customers are more consumed. However, Fulgent is selling itself to actually pharmaceutical companies and other health institutions, so its customers directly are more of a recurring-revenue basis than if it was just going directly to the consumer, giving them information and being once and done.

Lewis: Got you. Okay. So with LeMaitre, we were talking about how there is a pretty big sell-off with shares recently; opposite going on here with Fulgent. The company is at all-time highs and has really just been soaring. They IPO'ed in 2016, up about 90% since then. Any concerns with valuation for them?

Feroldi: Yeah, you're definitely paying up for the growth of this company. I mean, this company is currently trading at about 51 times forward earnings and more than 10 times sales. The reason that Wall Street has gotten so excited is, one, they're growing extremely rapidly; two, they've already achieved profitability, and the more important thing here is that the management believes that the global market for genetic testing is going to more than double by 2022 to exceed $10 billion. That is an enormous number when compared to the about $33 million in revenue that was expected to haul in during 2019. So if Fulgent can remain the low-cost leader with the most tests, the sky is truly the limit here.

Lewis: Yeah, that's a huge benefit, being a low-cost provider and still being in a position where you're able to make money on what you're doing. I have to say, as kind of an outsider observer to the healthcare space, nice to see that someone's able to become a little bit more efficient, bring their cost down and also bring patient cost down. I think that's pretty great.

Anything else on this stock or any of the three? You know, actually, Brian, before we transition to the nonstock part of the show, I have to ask you this. With three stocks, which one are you most excited about? Which one are you least excited about? I'm going to force you to force-rank these companies.

Feroldi: Awesome. Well, I wouldn't have highlighted any of them if I wasn't excited about all of them. But I must say that the growth investor in me is probably most excited about Semler Scientific, specifically because their business model is all about the software and all about the recurring revenue, and their margins are just incredible as it is. And unlike Fulgent, which also has a tremendous runway ahead of it, I like that Semler doesn't have to discount its costs. So any growth that is captured from here should flow directly to the bottom line, whereas there is a little bit of a trade-off with Fulgent.

In regards to LeMaitre, it would be my least favorite idea of these three, just because it's the slowest growing of them. But if you are more of an investor that's looking for a value investment and wants a slow and steady growth as opposed to wild share price fluctuations, that's a great stock to look at.

Lewis: All right. Well, now I know I'm talking to Brian Feroldi and not some stand-in or some doppelganger. That was all true to form. I feel like the recurring-revenue, high-margin, software style is basically the Feroldi model. And so, thank you for sharing these companies with us, Brian.

You may have known that as people are listening to the show and they're giving us five-star reviews on iTunes, I will read the review and answer any questions that they drop in there. It's always great to get some listener feedback.

Drew wrote to us recently in his review, "Really enjoy the podcast. However, I agree with others who have mentioned the volume being way lower for phone guests. I always have to crank up the volume when they talk and turn down the volume when the host talks. Gets old pretty quick, otherwise, keep up the good work."

And for that, I am going to turn the conversation over to our man Austin. We've been doing some testing to try to improve our audio quality. There are some issues that come with having someone in studio and also someone recording remote.

Austin Morgan: Yeah. Technically speaking, the perceived loudness is exactly the same, but because everyone's on different mikes and studio mikes and headsets, it sounds a little different, but we'll keep working on it.

Lewis: Yeah. I guess the short answer is, we've been mixing the show so that perceived loudness for the guests and the person in studio is exactly the same, but because we're working on slightly different equipment, we have slightly different speaking styles. I think we're going to try to raise what's going on with some of our external guests so that we have a more consistent listening experience. Is that about right, Austin. Did I jargon for you that pretty well?

Morgan: It sounds about right.

Lewis: All right. Sweet. Look at that. So we'll be testing some of that stuff this week. This might be a guinea pig episode for some of that.

We also had a second review. A Critic writes us, "Why do you only read five-star reviews, seems like a dishonest way to boost your ratings. Should either read all comments or non. You're providing an incentive to rate your show five stars, even if it doesn't deserve that. Still a fan, though."

And I think this is a totally valid criticism, aptly named, critic review here, and there's some good points. I want to give a little background on this decision and kind of what we do, why we do, we're kind of going behind the curtain a little bit in the last couple minutes of this show. So prior to doing these regular callouts for reviews and whatnot, we had 14 reviews total in 2019. So independent of what the rating was. And so we started doing this regular thing, and so far in 2020 we've had 20 reviews come in, and not all of them are five-star reviews. There are actually several that are lower than five-star, some one- or two-star reviews.

And anyone that works in the podcasting industry will say, five-star reviews are the lifeblood of a show. What we do is give away free content and the way that we're able to get in front of more people, get more downloads is by working well within the algorithms for iTunes, for Spotify, etc. And so I can understand how some people may not love this, but what we're doing is a free show, and we need to do certain things to boost ourselves up. So I intentionally put all this at the end of the episode so that folks don't have to hear it if they don't want to. But we are trying to promote people who know and love us to give us good feedback.

I will say, you know, there's nothing preventing people from leaving other reviews. And I read all reviews. And so far, the feedback from every non five-star review in 2020 has been worked into feedback that was read on the show. And so, we are not omitting any major issues, we're not omitting any glaring defects or anything like that. The only things that I won't really address on the show are things that are specifically targeted at one person, if it's negative, just because I don't think it's fair to put that person on blast. But the reality is, yeah, the five-star reviews help us a lot, and we are trying to promote people giving them to us as much as possible. But I am taking a lot of the feedback that comes in with some of the less-favorable reviews and making sure that those get air time as well.

I've really enjoyed having this feedback loop with our listeners, I think it's making us better as a show. Hopefully, it makes us a little bit more understood when our listeners are hearing our content and just trying to understand why we do, what we do.

So Critic, fair point. Just know that a lot of that stuff that isn't being baked into the five-star reviews is being discussed as well. I hope that's a satisfying answer, but, you know, it's kind of one of those business and editorial decisions that I've decided to make. If it's something that a lot of people don't like, we can totally revisit that.

All right, listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey!" shoot us an email over at or tweet us @MFIndustryFocus as well. If you want more stuff, subscribe on iTunes or wherever you get your podcasts.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell stocks based solely on what you hear.

Thanks to Austin Morgan for all his work behind the glass today and for all the tinkering he's going to do to keep making our audio even better. For Brian Feroldi, I'm Dylan Lewis. Thanks for listening, and Fool on!