Playing a Small-Cap Healthcare Stock With a Promising New Story to Tell
Finally moving past the 'Covid Cliff,' the company is ready to grow again with a fortress balance sheet. Here's my trade strategy.
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Like so many small-cap healthcare concerns, especially those in the diagnostic and testing space, Fulgent Genetics FLGT saw a massive surge in revenues during the Covid pandemic. Unfortunately, those sales dropped off a cliff when the pandemic became endemic. What this one-time boost in sales did allow Fulgent to do, however, is to build up a massive cash hoard that allowed it to survive while the environment normalized.
Fulgent is a name I have rolled my covered call positions within multiple times over the past two years. But now it's time to increase my exposure to Fulgent, as management has finally navigated the company’s "Covid Cliff" successfully. This was evident from the company’s first-quarter results that were posted on Friday.
The company delivered a non-GAAP profit of four cents a share, far above expectations looking for a loss of 18 cents a share. Revenues are growing again as all Covid-related sales have dissipated. Sales for the quarter rose 14% on a year-over-year basis.
The stock moved up sharply on Friday and management confirmed 2025 sales guidance of $310 million, which would imply 10% growth over 2024. Management also expects margins to improve in 2025.
So why did the stock rise nearly 20% rise to close out the trading week on for what for many companies would be pedestrian growth? I think the company has finally turned the corner and is turning into a powerful "sum-of-the-parts" story.
With the rally on Friday, the stock sits at around $20.50 a share. However, Fulgent ended the quarter with over $850 million of net cash and marketable securities on its balance sheet, or over $26.50 a share. The company’s long-term vision is to be a "one-stop shop" for cancer care and diagnostic testing. Covid sidetracked Fulgent from that mission briefly, but the company offers molecular diagnostic testing; genetic testing; anatomic pathology laboratory tests; and other related testing services.
Fulgent’s cash hoard means it has significant freedom of movement and should also put a floor under the stock. Management could make strategic bolt-on acquisitions to build out its product offerings in oncology testing around early detection, clinical diagnosis and post-treatment monitoring. It also could just do a massive stock buyback should it choose to do so.
The company also has a couple of promising, if early-stage drug candidates in its pipeline. This includes FID-007 (targeting head and neck squamous cell carcinoma), which just entered Phase 2 development. This nascent oncology drug pipeline could be enhanced via M&A.
Fulgent should see few, if any, impacts from tariffs, it should be noted. Meanwhile, I can enhance the attractiveness of this story via a simple covered call strategy highlighted below.
Option Strategy
This is how one can initiate a holding in FLGT with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the October $20 call strikes, fashion a covered call order with a net debit in the $17.40 to $17.60 a share range (net stock price - option premium).
This strategy provides downside protection of just over 14% with similar upside potential even if this equity trades slightly down over the option duration.
At the time of publication, Jensen was long FLGT.
