Few companies have suffered a faster rise and fall lately than Theranos, Inc. The company got tons of attention in recent years based on a seemingly innovative technology: a hand-held blood-testing device that promised to replace dozens of traditional blood tests by analyzing a few drops of blood obtained via pinprick rather than using vials of blood drawn with a needle. Noninvasive blood tests are a holy grail of the medical lab industry, so it’s not surprising that the privately held company attracted investors — its valuation hit $9 billion in 2014 based on hundreds of millions raised from investors. A partnership with Walgreens (Nasdaq: WBA) that same year seemed likely to make Theranos a household name.

But starting last fall, Theranos’ credibility was damaged by a series of negative reports about the effectiveness and accuracy of its device. Federal officials at more than one agency reportedly are probing the company, including a potential criminal investigation, and Walgreens has threatened to drop its relationship. Some analysts predict the company won’t survive. 

#-ad_banner-#If this episode casts a pall over other medical lab testing companies, it will only obscure the investment potential of that rare gem: a surefire growth industry. Medical lab tests are on the rise and will continue to grow in frequency and revenue for decades, thanks to the aging of America and medicine’s increasing ability to detect disease, or even risk of disease, through lab tests. Genetic testing is growing especially rapidly as scientists discover more genes that are linked to specific diseases.

In the shorter term, the global industry is expected to grow at a compounded annualized rate of around 6% over the next five years, driven by even higher growth rates for specialized genetic tests for cancer.

Laboratory Corporation of America (NYSE: LH) is the world’s #1 healthcare-diagnostics company, with more than $8.5 billion in 2015 revenue from more than 100 million patient interactions. The company has more than 1,700 patient service centers and 39 clinical labs and handles 500,000 patient specimens every day, analyzing them for one or more of 4,700-plus tests.

In addition to consumer-facing lab testing, which accounted for about three-quarters of revenue last year, LabCorp’s acquisition of Covance for $6.1 billion in 2014 made it the leading contract researcher to pharmaceutical companies, performing both early research and clinical trials; the company says it was involved in research on the top 50 drugs currently on the market.

Its new two-pronged market strategy gives LabCorp additional potential for market-share gains overseas, where the market for both consumer lab tests and pharmaceutical research is highly fragmented. LabCorp says it has an addressable market of more than $200 billion overseas, and its market leadership in the United States makes it a prime candidate to become the global leader as well. LabCorp also can diversify into food safety, substance abuse detection, paternity testing and other fields not directly related to medical tests. 

LabCorp’s immense scale gives it an advantage over competitors not only on cost but on its ability to generate information of value to insurers, pharmaceutical and medical device makers, physician groups and others. LabCorp is investing in research & development of information technology that can help it manage and interpret the “big data” it is amassing (with security procedures to protect patient confidentiality). Analysts at Credit Suisse argue that LabCorp should be viewed as an “informatics” company rather than a healthcare services company. They put a share-price target of $133 on the stock, based on that valuation metric framework.

Another important point: Skeptics of the lab-testing industry often suggest that its practitioners are vulnerable to declining reimbursements from a federal government eager to tighten the purse strings, but in fact only about 11% of LabCorp’s revenue is paid by Medicare or Medicaid. That percentage might decline despite the aging of America, thanks to the company’s diversification into non-medical areas.
 
LabCorp is strong financially, with robust cash flows. At recent prices, LabCorp trades at less than 14 times analysts’ consensus estimate for earnings per share in 2016. Expect the stock to rise to at least $130 by the end of 2016, but the real profits here may be in the next few years as investors realize that this market leader is growing in dominance in a market that’s expanding. A larger slice of a growing pie is a terrific recipe for tasty gains.

Risks To Consider: LabCorp frequently makes acquisitions, and poses the risk of overpaying, diversifying into a strategically unwise area or bungling an integration. But the company’s experienced management team has orchestrated many acquisitions seamlessly over the past decade, making these risks unlikely in my opinion. 
    
Action To Take: Buy LabCorp below $125.

Editor’s Note: An inside look into Donald Trump’s portfolio revealed that he owns a huge stake in one pharmaceutical stock that tripled his money in the late 90’s. And now he may be looking to replicate that profit with another little-known medical stock that creates a much-needed flu vaccine. Get the scoop on this under-the-radar stock — before it explodes — in this special report.