During the pandemic, diagnostic testing technology experienced significant growth primarily due to the urgent need for widespread COVID-19 testing.

QuidelOrtho (QDEL) was one of the big players providing these diagnostics services.

It manufactures and sells diagnostic testing technologies. Due to the huge demand for their products during the pandemic, Quidel minted a lot of cash.

That was until vaccines were created and the demand for these testing technologies began to fade away.

However, the company’s core business has never been COVID-19 tests. QuidelOrtho also provides a wide range of diagnostic kits and equipment for laboratories and clinics.

The stock has lost all the additional value from the pandemic, and the market expects the company to be worse than pre-pandemic levels.

Thus, QuidelOrtho showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

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The COVID-19 pandemic created an unprecedented demand for diagnostic testing technology, significantly benefiting this sector.

As the virus spread globally, there was an urgent need for effective, reliable, and rapid testing to identify and manage cases, trace contacts, and control outbreaks.

This necessity drove substantial investments and innovations in the field, leading to the development and widespread adoption of various testing methods, including PCR tests, rapid antigen tests, and at-home testing kits.

These advancements not only played a critical role in the immediate response to the pandemic but also catalyzed long-term improvements in diagnostic technology, expanding capabilities for future healthcare challenges.

The pandemic, therefore, acted as a catalyst for significant growth and evolution in the diagnostic testing industry, highlighting its importance in global health management.

This is where companies like QuidelOrtho (QDEL) came into play.

QuidelOrtho is a healthcare company that specializes in the development, manufacture, and marketing of diagnostic testing solutions.

Their product portfolio includes rapid diagnostic testing technology, particularly for infectious diseases, as well as blood-based immunoassays and molecular diagnostic products.

These products are used in a variety of healthcare settings, such as hospitals, clinical laboratories, and point-of-care locations, to aid in the diagnosis and management of medical conditions ranging from infections to chronic diseases.

The market thinks that with the pandemic over, QuidelOrtho’s profitability is going to suffer. However, the success of QuidelOrtho isn’t reliant on the pandemic.

Its core business is providing a wide range of diagnostic kits and equipment for laboratories and clinics that don’t rely on the pervasiveness of the pandemic.

On top of this, even before the pandemic hit, QuidelOrtho saw very strong profitability. In the three years prior to the pandemic, QuidelOrthos Uniform (“ROA”) grew from 19% in 2017 to 30% in 2019.

The chart shows that the company performed incredibly well and was growing profitability even before the pandemic. Clearly, even without the benefits of the pandemic, QuidelOrtho should continue performing well.

And yet, the market fails to recognize this opportunity.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall to 10%, assuming the demand will collapse.

Given the company’s strong profitability prior to the pandemic, these market expectations seem overly pessimistic.

QuidelOrtho has substantial potential to scale its operations and continue growing just like it did before the pandemic.

That is why QuidelOrtho showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click ,here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research