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The 1 Stock I'd Buy Right Now

By Jason Hawthorne - Sep 18, 2021 at 7:05AM

Key Points

  • COVID case trends hint at a huge upside surprise in revenue.
  • Strategic moves are strengthening its position domestically and internationally.
  • The pandemic gave investors a crystal ball into profitability.

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The pandemic isn't over yet.

There were a lot of companies that jumped to action last year in the fight against the SARS-CoV-2 virus. Videoconferencing, e-commerce, delivery apps, drug development and diagnostics all prospered. In that latter category, one company proved it has a business model to succeed long after the pandemic ends -- assuming it ever does.

Fulgent Genetics ( FLGT -2.10% ) burst onto the scene when the Food and Drug Administration (FDA) approved its test for detecting COVID-19 in June 2020. The company went on to increase its volume and revenue exponentially.

The stock struggled when cases dropped this past summer, but the company is making moves to become a major player in cancer detection. And the delta variant is putting Fulgent's testing in prime position all over again. For those reasons and the company's proven ability to turn a profit, it's one stock I have no reservations about buying right now.

A researcher examines a genetic sequence on transparent slide.

Image source: Getty Images.

COVID cases ramped up in the third quarter

For much of the past 18 months, companies involved in testing for the novel coronavirus have seen their stocks ebb and flow with the cadence of cases. It makes sense. If fewer people are getting sick, then there will likely be fewer people seeking tests. As things returned to normal in the U.S. over the summer, Fulgent's stock dropped more than 50% from its all-time high.

But the summer is over, and the delta variant has driven cases back up. Life may be returning to normal, but it's coming at the expense of a case rate like we had in January -- near the worst of the pandemic.

That should drive testing volume higher. It's helpful to look at numbers from the same time in previous quarters and how that impacted the company's revenue.

Fiscal Quarter U.S. Cases in First 47 Days of Quarter Quarterly Revenue
Q4 2020 3.97 million  $295.0 million
Q1 2021 7.63 million $359.4 million
Q2 2021 2.91 million $153.6 million
Q3 2021 7.44 million TBD

Data source: Fulgent Genetics, Centers for Disease Control & Prevention.

The virus is unpredictable. But at this pace, the company could have a quarter similar to the first quarter of this year. That would blow away management's revenue guidance of between $125 million and $150 million.

Strategic moves that set it up for the future

In August, management announced a pair of deals alongside its latest quarterly earnings. They should bolster Fulgent's competitive position in a post-pandemic world. They each strengthen the company's offerings in early cancer detection.

The first -- CSI Laboratories -- provides cancer diagnostics for pathologists. It adds more than 400 unique tests to Fulgents existing library of almost 20,000.

CSI will also be able to expand beyond the southeastern U.S., thanks to Fulgent's sales infrastructure. Most importantly, CSI has strong relationships with health insurers. It opens up 160 million covered lives to Fulgent's services. Management has long talked about those reimbursement relationships as a key to its future.

Its partnership with Helio Health is slightly different. Helio is an emerging liquid-biopsy company focusing on early detection of cancer. In this respect, it's similar to Guardant Health, Thrive by Exact Sciences, and Grail -- Illumina's controversial acquisition. It also offers global diversification. Helio has operations in China, but that isn't the company's only foray into the Middle Kingdom.

Fulgent made a $19 million investment in Chinese firm FF Gene Biotech in May to take a controlling interest. It had previously established the joint venture to get a foothold in China -- the native country of CEO Ming Hsieh. 

The company has already proven it will scale

Beyond the impressive inventory of tests and excellent capital allocation, there's another reason I have confidence in Fulgent Genetics if COVID wanes. Investors have already been given a glimpse into the company's ability to scale profitably. 

Management had long touted its lab efficiencies and automation since going public in 2016, and 2020 proved it. As cases ramped up last year, its ability to quickly scale testing at a rate faster than expenses shone through. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) as a percent of sales have expanded through the years.

First Six Months of Fiscal Year YoY Revenue Growth Adjusted EBITDA Margin
2021 1,950% 73%
2020 81% 15%
2019 37% 5.9%

Data source: Fulgent Genetics; YoY=year over year.

It's the type of claim investors usually have to wait to suss out. Yet after a global pandemic, shareholders can rest assured with the knowledge that profit is very likely to grow faster than sales in the years ahead.

That will happen with or without a pandemic. Combined with becoming a bigger presence in China and a reimbursable option for insured patients here in the U.S., it makes Fulgent Genetics a stock I'm confident adding to my portfolio right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Fulgent Genetics, Inc. Stock Quote
Fulgent Genetics, Inc.
FLGT
$81.80 (-2.10%) $-1.75
Illumina, Inc. Stock Quote
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ILMN
$347.28 (-2.85%) $-10.20
Exact Sciences Corporation Stock Quote
Exact Sciences Corporation
EXAS
$76.59 (-4.94%) $-3.98
Guardant Health, Inc. Stock Quote
Guardant Health, Inc.
GH
$90.70 (-5.50%) $-5.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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