3 Reasons to Sell DGX and 1 Stock to Buy Instead
Is there a buying opportunity in Quest, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it's free.
Despite the momentum, we're swiping left on Quest for now. Here are three reasons why we avoid DGX and a stock we'd rather own.
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Testing & Diagnostics Services company because there's a ceiling to what customers will pay.
Quest's requisition volumes came in at 59 million in the latest quarter, and over the last two years, averaged 4.5% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Looking at the trend in its profitability, Quest's adjusted operating margin decreased by 10.3 percentage points over the last five years. This raises questions about the company's expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 15.7%.
A company's ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company's ROIC is what often surprises the market and moves the stock price. Unfortunately, Quest's ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Quest's business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 17.6× forward P/E (or $173.97 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn't great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger's all-time favorite businesses.
Donald Trump's victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.
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