One area of the economy that has performed relatively well over the course of the global health crisis has been the healthcare sector, specifically diagnostic and testing companies. Quest Diagnostics (DGX) is no exception to that statement as the company has been very active in COVID-19 testing over the last 15-16 months. It appears that COVID-19 testing is slowing down, but with the different variants that are popping up, it doesn’t look like testing will go away completely for quite a while.

Even without COVID testing, Quest should be positioned to do well going forward. The company has partnered with or is designated as a preferred lab with a great number of insurance companies and it provides testing for a number of different diseases and medical ailments.

One of the things that got my attention for the stock was the weekly chart and the trend channel that has formed over the last year. The high from last July connects with the highs from October and this past May to form the upper rail of the channel. The lows from last August and this past February connect to form the lower rail. A recent decline in the stock has brought the stock down away from the upper rail and out of overbought territory.

The stock isn’t quite down to the lower rail of the channel, but the weekly stochastic indicators have moved down below the 4o level. This is only the fourth time in the last two years that the indicators have dropped below the 4o mark.

Strong Profitability Measurements Highlight the Fundamentals

After analyzing the chart, I turned my attention to the fundamental analysis for Quest and found that it has a number of positive attributes. Earnings grew by 300% in the most recent quarterly report compared to the same period last year. Revenue jumped by 49% in the first quarter compared to Q1 2020. Earnings have grown at an average rate of 23% per year over the last three years. Revenue has grown at a rate of 8% per year over the same period.

Tickeron’s Scorecard shows Quest as a “strong buy” at this time. The company gets positive marks in five categories and it only gets one negative mark. On the technical analysis screener there are two bullish signals and only one bearish signal at this time.

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The fundamental areas where Quest gets the highest ratings are in the Valuation Rating and the Outlook Rating. It also gets above average marks in the Profit vs. Rick Rating and the SMR Rating. The seasonality score is also positive at this time. The only negative mark comes from the P/E Growth Rating.

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Looking at a couple of the indicators that help generate the Valuation Rating, the company’s trailing P/E ratio is 9.8 and the forward P/E is 11.4. Those levels are well below the average stock in general and they are well below the industry average.

The SMR Rating is made up of sales growth, profit margin, and the return on equity—the profitability measurements. Quest has an ROE of 24.6% and a profit margin of 22.5%. Those figures are also better than the average stock and considerably higher than the industry averages.

Short Sellers are Pretty Pessimistic on Quest

The sentiment indicators for Quest show that there is plenty of pessimism toward the stock. There are 17 analysts covering the stock at this time with 10 “buy” ratings and seven “hold” ratings. This puts the buy percentage, the number of buy ratings as a percentage of total ratings, at 58.8% and that is below average. The average buy percentage falls in the 65% to 75% range. While the buy percentage isn’t terribly low, it is noticeable for a stock that has strong fundamentals like Quest.

Short sellers are considerably more bearish on the stock than the average stock. The short interest ratio is 8.0 and that is much higher than the average ratio which is typically in the 3.0 range. It’s even more alarming when you consider that the short interest dropped to 9.31 million shares from 10.36 million shares in the period from mid-May to mid-June. Having a high short interest ratio can benefit a stock if the stock rallies. If short sellers are forced to cover their positions, it will add buying pressure to a stock that is already rallying.

If we consider all three of the analysis forms, Quest seems to be positioned to continue moving higher. The chart shows the trend channel that is helping guide the stock higher and how the stochastic indicators are below the 40 level. The fundamentals show low valuations, high profitability measurements, and good earnings and revenue growth. The sentiment analysis shows that analysts and short sellers are anything but optimistic toward the stock and that is good news from a contrarian perspective. Low investor sentiment means there are plenty of investors on the sidelines that can come in as buyers or bears that flip to the bullish camp.

I look for Quest to continue its path higher over the next few quarters at the very least. The fundamentals are strong and the expectations appear to be low, that’s a good combination for a stock that is already trending higher.