3 Reasons to Sell DGX and 1 Stock to Buy Instead

Even though Quest (currently trading at $183.49 per share) has gained 6% over the last six months, it has lagged the S&P 500’s 15.5% return during that period. This might have investors contemplating their next move.

Is now the time to buy Quest, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Quest Not Exciting?

We don't have much confidence in Quest. Here are three reasons why DGX doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Quest grew its sales at a mediocre 6.9% compounded annual growth rate. This fell short of our benchmark for the healthcare sector.

2. Shrinking Adjusted Operating Margin

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 11.1 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 15.8%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Over the last few years, Quest’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Quest isn’t a terrible business, but it doesn’t pass our bar. With its shares lagging the market recently, the stock trades at 18.2× forward P/E (or $183.49 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Quest

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