Revisiting a Top Contrarian Stock Pick of 2021

Covid testing company Fulgent Genetics has potential to be an industry heavyweight

Managing Editor
Jun 17, 2021 at 8:14 AM
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As we kicked off 2021, we highlighted two top contrarian picks for the new year. Senior Market Strategist Matthew Timpane delivered one pick that, six months into the year, has delivered a tidy gain of 43.6%. To access the entirety of the 2021 report, click here. Below, we're going to conduct a little postmortem on FLGT, while looking ahead to see what the stock has left for the final six months of 2021.

Medical device maker Fulgent Genetics Inc (NASDAQ:FLGT) has received quite the revenue boost from NGS (Next-Generation Sequencing) surveillance, which is used to track coronavirus mutations that are integral to vaccine management. Covid-19 testing is bound to continue as new variants of the SARS - CoV - 2 strain continue to emerge. It's a sobering thought, but herd immunity is a long way out, so testing will continue albeit at a lower rate. And despite recent international expansion, many countries still don't have Covid-19 under control.

Fulgent Genetics has a chance to continue to be a heavyweight in the field thanks to its status as a low-cost provider, and the hope is that the success in Covid-19 testing should carry over to other genetic and disease-specific testing segments of the business. One storyline to watch; with a market cap of only $2.44 billion, Fulgent Genetics could be a takeover target for larger companies. With that in mind, lets review FLGT’s prospects for the rest of 2021.

The fundamental backdrop of Fulgent paints an optimistic picture. Over $1 Billion in cash reserves is expected by the end of the year – a veritable war chest thanks to Covid-19 testing. So, another storyline to watch for the second half of 2021 becomes; how will the company deploy it? It's also reasonable to expect Fulgent's revenue growth to  taper off  from the extreme levels it has enjoyed during the last year. Yet, 2022 projections are still at nearly 97%, so there's reason to believe this is not just a flash in the pan.

On the charts, Fulgent Genetics stock fleshed out a bottom after pulling back to its 200-day and 40-week moving averages. The shares recently broke out of a large symmetrical triangle pattern, hinting at a continuation to the upside.  At one point up 252% by February, a pullback should have been expected, as profit-takers stepped in on such a quick run-up. But now with the stock up 44% year-to-date, this presents a unique buying opportunity to get long, or add to your position and trade against the aforementioned trendlines, with that uptrend a convenient stop level. And with a forward-year price/earnings ratio at 6.68, FLGT becomes an intriguing target as a value trade.

Short interest has rolled over from its mid-April peak, and with 30% of FLGT's total available float sold short, a contrarian would look at this setup as a potentially tidy short squeeze.

Despite the recent volatility, FLGT options are reasonably priced at the moment, too per the stock's Schaeffer's Volatility Index (SVI) of 68%, which stands higher than just 6% of all other readings in its annual range. This implies that options players are pricing in relatively low volatility expectations. 

 

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