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Why Fulgent Genetics (FLGT) Stock is a Compelling Investment Case

Old West Investment Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. The S&P was up 20% in the quarter, the Russell 2000 small cap index was up 25%, and the firm was up over 30% in all portfolios except for its Income Fund, which was up 19%. You should check out Old West Investment Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Old West Investment Management highlighted a few stocks and Fulgent Genetics Inc. (NASDAQ:FLGT) is one of them. Fulgent Genetics Inc. (NASDAQ:FLGT) focuses on providing genetic testing services to physicians with clinically actionable diagnostic information. Year-to-date, Fulgent Genetics Inc. (NASDAQ:FLGT) stock gained 273.1% and on August 20th it had a closing price of $50.51. Here is what Old West Investment Management said:

“Fulgent Genetics (FLGT) is a genetic testing and diagnostics company. Fulgent’s unique technology platform enables the company to create the most effective and wide-ranging genetic tests on the market with both flexibility and affordability. Fulgent’s gene probes combined with their software provide rapid implementation of more genes to their test menu and develop more disease-specific tests with relatively less cost than their peers.

Headquartered just a short drive down the 10 freeway from our offices in Los Angeles, Fulgent was founded in 2011 by Chairman, President and CEO Ming Hsieh. Ming has a proven track record of leading businesses to the outstanding benefits of customers, clients’, and stakeholders. Ming previously founded Cogent, Inc. in 1990 and grew that business until selling it to 3M in 2010. He is a true steward of equity capital and a strong reason we like the business.

Starting with the tone at the top, Ming had not earned or received any salary for his services until the IPO in September of 2016. For over five years, Ming worked for free! That alone should prove Ming’s grit, determination, and character to even the most critical observer. In addition, Ming owns approximately 36% of the company and receives far more incentive from his equity ownership than he does from his salary. He is an owner-operator in every which way – an ideal characteristic of what we look for in a good business. In fact, all directors and executive officers own approximately 47% of the entire business, placing Fulgent in top of the top owner-operator businesses we invest alongside.

Last quarter, Fulgent generated $7.8 million in revenue, up 44% quarter over quarter and consistent with our long-term growth expectations of $50 million for 2020. FLGT’s current market cap is $438 million with an enterprise value of $383 million! That’s right, Fulgent has a lower enterprise value than market value due to zero debt and excess cash and investments – a rarity in any business, let alone one with as bright a future as Fulgent. In a world of seemingly limitless cheap debt and appetite for extreme risk taking by management teams, it is refreshing to see Ming and his top lieutenants’ create an outstanding business without the need for excess leverage – a core concept to enduring intrinsic value growth.

With a book value of $81.4 million, consisting of over $71 million in cash, marketable securities and investments, and no debt, Fulgent offers incredible returns on tangible net assets in the coming years, creating significant economic goodwill. Incremental capital can be reinvested back into the business to fund additional sources of revenue rather than decrease debt, as is the case with Picture by Fulgent, a new and exciting at-home patient-initiated genetic testing offering. In fact, Picture by Fulgent is now providing FDA-authorized, athome COVID-19 test kits to help fight this global pandemic. More information can be found at https://www.picturegenetics.com/covid19 if you are interested.

Currently, there are only 3 analysts covering Fulgent. Terrifying for those that rely on the comfort of others, but an exciting opportunity we look for when searching for a competitive advantage between market price and underlying business valuation distortions.

Fulgent is a unique growth opportunity at a relatively cheap price of $20 per share (our average cost is $6.00), and one we think will require analysts and other market participants to take notice in the coming years…but even if they do not, we believe strongly in the underlying business fundamentals and significant growth in intrinsic value as Fulgent becomes profitable this year and beyond. Ming truly is building a great business, and we are fortunate to be able to invest alongside him.”

In Q1 2020, the number of bullish hedge fund positions on Fulgent Genetics Inc. (NASDAQ:FLGT) stock decreased by about 18% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Fulgent Genetics’ upside potential. Our calculations showed that Fulgent Genetics Inc. (NASDAQ:FLGT) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.