Short squeezes seem to have become something of a national pastime. Multiple heavily shorted stocks have skyrocketed this year, in large part because they were targeted by Reddit users looking for opportunities to make a lot of money very quickly.
Many of these stocks might have been lucrative to trade as short-sellers rushed to cover their positions. However, most of them aren't great picks for long-term investors. Their underlying business dynamics still aren't good despite their rising share prices.
There's at least one notable exception, though. Here's one short-squeeze stock that's actually a smart pick to buy and hold for the long term.
Image source: Getty Images.
Crushing it in COVID-19 testing
Fulgent Genetics' (NASDAQ:FLGT) shares have more than tripled so far this year. Some of these gains have been the result of a short squeeze. Nearly 30% of Fulgent's float was sold short as of late January.
However, there's also another reason behind the healthcare stock's impressive performance. Fulgent has been absolutely crushing it with its COVID-19 testing products and services.
In 2020, Fulgent pivoted from its primary genetic testing products to focus on COVID-19 testing. In the third quarter of last year, it generated nearly $102 million in revenue, a whopping 880% year-over-year jump. Most of that growth came from its COVID-19 tests.
The company's reverse transcription polymerase chain reaction (RT-PCR) COVID-19 test won emergency use authorization (EUA) from the U.S. Food and Drug Administration (FDA). Fulgent also offers a next-generation sequencing COVID-19 diagnostic test and an antibody test for lab use only. Physicians and healthcare facilities can even order a three-in-one test for diagnosing COVID-19, influenza A, and influenza B. In addition, Fulgent and Picture Genetics teamed up on an at-home COVID test.
Will Fulgent's COVID-19 revenue growth taper off? Sure. As more people are vaccinated, COVID-19 testing volumes will likely decline. However, the novel coronavirus won't go away. It will continue mutating, with new strains emerging. Fulgent will probably continue to generate solid revenue from COVID-19 testing for a long time to come.
But wait -- there's more
Don't overlook the rest of Fulgent's business, though. In Q3, the company's non-COVID revenue soared 57% quarter-over-quarter. That's impressive growth in its own right.
Fulgent initially focused on genetic testing for rare pediatric diseases. It then expanded into testing for cardiovascular and neurological disorders and for cancer. Today, the company offers a wide range of genomic testing.
There are other players in the genomic testing market, of course. How can Fulgent win? The company has two primary competitive advantages. First, the flexibility of its technology enables Fulgent to quickly launch new products and services. Second, Fulgent boasts a market-leading cost structure.
Companies usually beat their rivals by either being better, faster, or cheaper. Fulgent checks off at least two of those boxes.
The long and short of it
It's possible (and perhaps even probable) that Fulgent's share price will pull back significantly this year as the euphoria from the COVID boom and the short squeeze wear off. Some Wall Street analysts practically hate the stock, with the average analysts price target only a little over half of Fulgent's current share price.
But the long-term potential for Fulgent is compelling. The global genetic testing market should reach $10 billion by 2022. That's just a start. Expect a ramp-up in consumer-driven genetic tests over the next few years.
Even with the stock's huge run-up this year, Fulgent Genetics' market cap stands below $4 billion. Considering the company's total addressable market and its ability to execute, I think Fulgent could be worth a lot more by the end of this decade.
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February 15, 2021 at 06:01PM
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Here's 1 Short-Squeeze Stock That's Actually a Smart Pick to Buy and Hold - Motley Fool
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