Schaeffer's Investment Research: Top 2 Contrarian Stock Picks For 2021
Typically speaking, contrarian involves going against the grain, either by buying stocks most other investors are selling, or vice versa.
Yet, this exact sentiment towards contrarian investing isn’t necessarily universal. For Schaeffer’s Investment Research, the company has a different approach to contrarian thinking.
“Generally, people are looking for beaten-down stocks, value type of plays, against the trend. However, we look at it from a sentiment standpoint, trading with the broader trend,” said Matthew Timpane, senior market strategist at Schaeffer’s Investment Research.
So by looking at stock investment opportunities from a more unqiue sentiment standpoint, here are Schaeffer’s top two contrarian stock picks for 2021.
Datadog (DDOG)
Datadog Inc (NASDAQ: DDOG) is a software and data monitoring company that has seen significant growth over the past year going from $28 during the March sell-off to $103 as of Thursday. But Schaeffer’s still thinks the stock has room to run.
One reason they consider this a contrarian call is the tepid growth projections for 2021.
Current analyst projections for DDOG’s 2021 revenue growth sit around 30% versus 62% in 2020. This lowered growth projection is due largely to the expectation that business’ IT spend will be fairly conservative this year. But Timpane believes enterprise spending will likely rebound as we move further away from pandemic mode, which would act as a tailwind.
“I expect IT spend will at least recover in 2021, if not expand in the post-vaccine world, as we’ve realized how important technology is to control systematic risk and keep companies operating efficiently in uncertain times,” he said.
Timpane also noted DDOG’s recent partnership with Microsoft Corporation (NASDAQ: MSFT) in September as a reason to be bullish, as it will allow both sales teams to cross-sell. Also notable is the company’s increase in consumer product usage.
Of Datadog’s customers, about 71% are using two or more products. This number is up from 50% last year. The company also saw a 20% increase in customers who are using four or more products.
Fulgent Genetics (FLGT)
In the midst of a global pandemic, it comes as no surprise that the healthcare sector experienced significant growth. Medical device maker and genetics company Fulgent Genetics Inc (NASDAQ: FLGT) was no exception, with the company’s stock rising from about $13 to $66 over the last 12 months.
One major contributing factor to this growth was the company’s at-home COVID-19 test kit, which was granted Emergency Use Authorization by the FDA on June 16. But while the stock has risen as much as 1200% since March, Timpane says it is still undervalued relative to its peers.
Many analysts currently regard Fulgent’s COVID-19 tests as a temporary catalyst given the current distribution of vaccines across the country. Timpane, however, noted that pandemics are rarely eradicated within one year, and because of that, COVID-19 testing will likely remain a key component of healthcare for the next few years.
“Fulgent is well-equipped to handle the volume though,” said Timpane. “It's expected to outpace rival Co-Diagnostics Inc (NASDAQ: CODX) by up to 30% in total revenues in 2020, and was able to scale its test and up the headcount growth, while still inching margins up by 8%.”
Fulgent’s COVID tests aren’t the only reason Schaeffer’s is bullish. The core of Fulgent’s company is its genetic testing division, which more than doubled from 2018 to 2019. This far exceeded the growth rate of other companies in this sector such as InVitae Corp (NYSE: NVTA), Illumina, Inc. (NASDAQ: ILMN), and Natera Inc (NASDAQ: NTRA).
“This means that even if the coronavirus pandemic becomes quickly under control, Fulgent can still hang its hat on core genetic testing,” Timpane said. “Fulgent offers 18,000 genetic tests, thousands more than the competition.”
Photo by Chris Liverani on Unsplash
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