Key Points
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Druckenmiller owns a large stake in Natera.
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The company is growing quickly by disrupting the healthcare testing market.
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The stock trades at a premium valuation today.
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It can pay to follow the investing legends. That is why investors take a good, hard look at the portfolio of Stanley Druckenmiller, a hedge fund legend who has dominated the investing field for decades. Last quarter, Druckenmiller’s largest position was Natera (NASDAQ: NTRA), an underfollowed healthcare stock trying to disrupt the diagnostics market.
Should you follow Druckenmiller and buy Natera stock for your portfolio?
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Fast growth in medical diagnostics
Natera develops blood tests that detect and analyze DNA in a patient’s bloodstream, including fragments that are unique to that individual or to a specific condition. That makes the technology useful across three large areas: prenatal screening, organ transplant monitoring, and cancer care. In each case, patients need to be retested repeatedly over time, whether to track a pregnancy, check for signs of organ rejection, or watch for cancer recurrence. Once a physician builds a test into a patient’s routine care, those repeat orders flow back to Natera, providing the company with a recurring stream of revenue from processing the samples.
This has led to explosive revenue growth over the past few years as its testing products gain adoption. Last quarter, Natera processed over 1 million tests, an increase of 22% from a year ago, and recorded revenue growth of 37.7%. Over the long term, revenue has increased by over 1,000% in the last 10 years. This revenue growth trajectory is likely what led Druckenmiller to start buying the stock. He added to his position last quarter.
Natera could also benefit from artificial intelligence (AI). Since it processes so many tests, it is working with Nvidia and cloud providers such as Amazon to draw insights from the data it has amassed over the years. This could be helpful for the development of precision medicines.
Why investors should sit on the sidelines (for now)
Natera is likely to keep growing revenue in the years ahead. Owners shouldn’t sell today just because it is up big (250%) in the past five years, given the revenue growth runway.
However, the stock trades at a price-to-sales ratio (P/S) of 21, which is well above its long-term average. The last time Natera was at this P/S ratio, it followed up with a 70% price drawdown.
This is the type of risk investors are getting by chasing Natera at a premium valuation. Druckenmiller may have seen this stock early and made a great bet, but following him today may not end well.
Should you buy stock in Natera right now?
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Natera, and Nvidia. The Motley Fool has a disclosure policy.
