CVS Health Corp (CVS)

He is bullish on healthcare. It began underperforming in 2015. It broke out recently. It is the largest industry weight in almost all of his portfolios. His biggest concern is that they have a direct exposure to pharma prices. He prefers United Health. XLV-Q plays it broadly but he does not recommend ETFs. You can see what happened to it in 2015.

He likes the space. He likes the company. He thinks you can buy CVS through Aetna Inc. (AET-N) at a 3-4% discount as both are going to merge soon and it has been approved.

They'll merge with Aetna, a managed-care company. The U.S. has to manage its large healthcare costs. CVS has responded by opening mini-clinics for minor ailments, like a sore throat as opposed to seeing a doctor. This is interesting. Two concerns: 1) What will Washington do with rebates around the pharmacy benefit management business; is that a threat? 2) Amazon getting into the pharmacy business.

He still really likes this. He thinks it could be a $100 stock. It is also very defensive. Good valuation and good dividend.

Trades at 9x earnings. The Aetna deal with likely be approved soon, being a vertical integration in the healthcare sector. The only question is can they integrate successfully? (2.7%, Analysts' price target: $88.14)

The drug stocks are defensive. Consumer discretionary has been doing well. CVS had 19% earnings growth, and estimated 4% next year, which is not enough in a bull market to take advantage of economic strength. You could see money rotate away from this sector.

(A Top Pick June 27/17 Up 2%) He no longer owns this as it did not perform as they had expected. It has become a pharmacy that merged with Aetna – now he does not know what the company strategy is going forward.

(A Top Pick June 22/17 - Down 3%.) Still believe in it. They bought Aetna and that brought some issues with debt and integration. He thinks that they will start to execute well.

The Amazon.com (AMZN-Q) scare affected the price of the stock. Trades at reasonable multiples. (Analysts’ price target is $85.95)

Eighteen percent of GDP goes to health in the United States, compared to 11% in Canada. CVS is trying to be a health solution to the US population and is well positioned to do it. Their purchase of Aetna gives them a large and strong insurance component. Caremark is a pharmacy benefits manager that gives them buying power with the drug companies and enables them to price their insurance favorably. They have 10,000 storefronts, a store within 3 miles of 70% of the population. CVS has been beaten down out of a fear that Amazon would take the business, but it is a large company of seasoned professionals in a highly regulated industry. They are not going to roll over for Amazon. Yield 2.7%. (Analysts’ price target is $85.95)

Really likes. He’s doubled down. There is headline risk with the Aetna deal still ongoing, the Amazon effect, and US rhetoric about decreasing drug costs. Underlying earnings trend is strong. At a great level now. Over next year or two should tick back up.