Why the COVID-19 Crisis Can’t Sink Quest Diagnostics (DGX) Stock?

Fiduciary Management, Inc recently released its Q1 2020 Investor Letter, a copy of which you can download below. The FMI Large Cap Fund posted a return of -23.0% for the quarter, underperforming its benchmark, the S&P 500 Index which returned -19.60% in the same quarter. You should check out Fiduciary Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Fiduciary Management highlighted a few stocks and Quest Diagnostics Inc (NYSE:DGX) is one of them. Quest Diagnostics is a clinical laboratory company. Year-to-date, DGX stock gained 5.6% and on May 15th it had a closing price of $111.08. Its market cap is of $15.2 billion. Here is what Fiduciary Management said:

“Quest Diagnostics is normally a very steady business, as medical testing typically follows a consistent cadence. Quest and Lab Corporation together are the most efficient, lowest-cost lab network providers in the United States, gradually taking market share from both small labs that aren’t as efficient, and hospital labs that charge much more per test. Prior to COVID-19, the story was one of solid mid-single-digit volume growth, driven by share gains (small labs struggling due to Medicare reimbursement pressure), and the early innings of UnitedHealth’s preferred lab opportunity, which was designed to force volumes out of high-cost hospital labs and towards Quest & Lab Corporation. This was being offset by normal declines in commercial price, and a much bigger near-term slide in Medicare prices, due to regulatory edicts. We expect the regulatory pressure to wane. Although partially offset by COVID-19 tests, in the near-term, COVID-19 is resulting in a deferral of many medical visits and procedures that would normally send test volumes to Quest. We view this as a temporary setback. Quest is a durable business, has a good balance sheet, trades at a low-teens earnings multiple and has a 2.5% dividend yield.”

In Q4 2019, the number of bullish hedge fund positions on DGX stock decreased by about 14% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with DGX’s growth potential.

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