2 Potential 10-Bagger Stocks Cathie Wood and ARK Don't Own Yet

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Cathie Wood and her investment management firm, ARK Invest, have gained a dedicated following over the past few years. ARK has earned this attention through its publication of detailed predictions about several industries, as well as stellar investment performance. In fact, ARK’s funds have all doubled over the past 12 months.

Two companies her funds don’t own, but probably wish they did, are Fulgent Genetics (NASDAQ:FLGT) and Inari Medical (NASDAQ:NARI). The fast-growing healthcare companies are exhibiting many of the disruptive characteristics that Wood loves. That might make it a perfect time for risk-tolerant investors to snap up shares.

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1. Fulgent Genetics

Fulgent offers tests for more than 18,000 individual genes and 5,700 genetic conditions. The company’s testing platform integrates next-generation sequencing (NGS) and adaptive algorithms to quickly deliver information physicians can use. It does this at a competitive price thanks to efficient lab processes and a lean cost structure. Fulgent was able to secure an emergency use authorization for its COVID-19 test in May, and conducted more than 4.4 million billable tests in 2020. That’s an enormous leap from 60,000 in 2019. And Wall Street has noticed: Shares are up 1,120% over the past 12 months.

The result of all that testing in 2020 was $422 million in revenue, almost 1,200% more than the previous year. Management expects the good times to continue in 2021 for both COVID testing and the core genetics business. Overall, they expect 90% growth, or approximately $800 million in sales, and non-GAAP income of $12.50 per share.

A significant contributor should be the company’s Picture Genetics platform. The $119 at-home collection kit allows consumers, or partners like schools and employers, to send in samples for analysis. Through Picture, the company is offering both COVID and non-COVID testing, bringing next-generation sequencing to the at-home market. This contrasts with the more recreational kits that many are familiar with like 23andMe.

Fulgent has also recently launched software products for both vaccine management and community testing, and is the testing provider for the largest school system in the U.S. (New York City), as well as the recognized top provider in the largest state by population (California). Further, the company was recently selected by both the Department of Homeland Security and the Centers for Disease Control (CDC) as a testing partner. 

With Fulgent’s rapid growth and profitability, it’s surprising the ARK Invest team has yet to add the company to its portfolio, opting instead for competitor Invitae Corporation (NYSE:NVTA). That gives investors an opportunity to pick up shares before the potential stampede of money that would follow ARK into the stock. Although shares of a $3 billion company are going to be volatile, investors who believe in the future of personalized medicine may find them worth adding to a diversified portfolio.

2. Inari Medical

Since Inari’s initial public offering last May, the medical device company has put up amazing growth numbers, despite headwinds from COVID. Inari’s disposable FlowTriever and ClotTriever clot-removing devices helped 4,600 patients in 2020, up 144% from the prior year. The devices treat pulmonary embolism (PE) and deep vein thrombosis (DVT), respectively. While DVT isn’t life-threatening, those with the condition experience pain and swelling in the legs, often restricting their ability to work. On the other hand, a PE is extremely dangerous, occurring when a clot breaks free and travels to the lungs. This condition is the number one cause of preventable deaths in hospitals.

Physicians are embracing the tools for two main reasons. First, the alternative to the easy-to-use devices is clot-busting drugs. These thrombolytics, as they are called, are expensive, potentially dangerous, and often ineffective. Further, the risk of bleeding requires the patient be admitted to the intensive care unit, a costly place for patient stays. Second, as disposables, the devices don’t require large capital expenses. Without those large purchases, physicians are able to avoid approvals from health system executives and the subsequent red tape of the procurement process. Once a physician learns to use the devices, it’s easy to keep reordering and using them. 

Management estimates the current addressable market at $3.6 billion, but incremental improvements promise to continue expanding the opportunity. The recent introduction of the Triever 20 Curve, a device designed for free-floating clots, adds $200 million to the opportunity. Inari might not fit neatly into one of ARK’s themes, but its ability to lower both healthcare costs and patient risk is resonating with doctors.

Interested shareholders will have to overlook the valuation, however — the price-to-earnings ratio (P/E) is currently above 600. However, long-term investors are wise to ignore inflated metrics early in a company’s growth story. Intuitive Surgical, another medical device maker, had a PE ratio near 300 in 2005 and has gone on to deliver a more than 5,000% return for shareholders since. Returns like that are not guaranteed, but it’s a good lesson that a P/E ratio means little when a company is growing more than 100% annually.

Follow the business, not the investor

Regardless of who ends up buying shares of Fulgent or Inari, it’s wise to make decisions based on how the businesses are performing rather than who owns shares. Any company, especially one as young and small as Inari or Fulgent, is going to experience stock price volatility over time.

If customers are happy and eager to do more business, and management is converting sales into cash, stock declines can be viewed as opportunities. Without that information, it can be emotionally difficult to avoid selling a stock if the main reason to buy was because someone else did.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.