CVS Health Corp (CVS)

This owns a pharmaceutical benefits manager division and a number of other assets. It is a wonderful business. Every year they raise their dividend, buys back stock and grows its earnings. All the pharmaceutical benefits managers are under pressure right now because of worries about drug pricing and how they make money. This one has been absolutely slaughtered. Trading at a multiyear low in terms of valuation. 2-3 years from now, it will be materially higher that it is today.

It is getting hit because of the pharmacy benefits space. They are getting squeezed from pressure to lower prices on drugs. Their margins on these drugs are going down. Revenues are going to deteriorate. The pressure won’t abate no matter who gets in. He prefers Walgreens.

He has owned it in the past. There is pressure on their operating margins. This year you could not fault any health care name for going down. Wait for November 8^th. It doesn’t matter who gets in. He thinks they will be a strong performer in the fourth quarter of this year.

(Market Call Minute.) The company has done a pretty good job in cutting costs. The stock is behaving well relative to retail. It is a defensive name. He is less interested in consumer discretionary, and more interested in tech, healthcare, financials and energy.

(Top Pick Nov 25/16, Down 5.83%) They are different from regular drug retail. She thinks they will still maintain their 14%+ annual earnings growth. They bought all the Target pharmacies. She likes it here. It is at a historical low.

Drug retail in the US is in a very tough spot. Looking at the number of pharmacies needed versus how many you’ve actually got, you have 34% more than needed. There are so many pharmacies, and margins have gotten so large in pharmacies that insurers are now coming into a geographic area and getting lower bids on their dispensing margins. He sees a steady, annual re-rating of gross profits in pharmacies, and the dispensing margins staying under pressure. Valuations are not very attractive at the current time.

It was a top pick last month. It has come off since then so he would be a buyer. They are a pharmacy benefits manager and they own 800 clinics.

CVS (CVS-N) or Walgreen Boots Alliance (WBA-Q)? This one has Caremark, a pharmacy benefit manager, which makes up about a 3^rd of their business. Over the past few months, this has caused him a little concern. It is not as transparent in terms of pricing, and a lot of the PBM’s are hiding behind competitive advantage and not wanting their competitors to know what their pricing is. He likes them both. This one is a little cheaper.

Biggest retail pharma in the US. 20+% dividend growth for 7 years. He expects at least 16% dividend growth going forward.

For some reason, this is being pressured along with the rest of the healthcare space simply because of the potential regulatory changes that may be revised. Even if they do, this company is one of those great business models that is both combined Retail/Pharma as well as Pharma Benefit Management. It has great margins relative to its peer group. Also, demographics are really promising. 8% of the consumer wallet is spent on healthcare, and that is going to be growing to north of 14%-15% in the years ahead. Dividend yield of 1.82%.

Growing double digits on the top and bottom lines. It held up when the markets were down 10% at the beginning of the year.

(Top Pick Aug 6/15, Down 8.66%) He thinks they did a smart and innovative thing. They are now doing healthcare in the home as well as having a doctor in every location. He is still bullish.

Just recently reported, and had a very, very strong quarter. This is a pharmacy that fills a lot of prescriptions. It is also a pharmacy benefits manager, so they are a consolidator and a representative for large groups. There are a lot of things going for a company like this, such as aging demographics, and greater US insurance for people.

It made a transition over the last 10 years to pharmacy benefits. It pulled back and only trades at 15 times earnings. It has great growth potential if you consider the aging demographics. A strong labour market means more people are spending more on healthcare.

(A Top Pick June 25/15. Down 9.1%.) Sold his holdings a while ago. Didn’t really see the stock moving at that time, so he moved on to other things. He would consider this if it got cheap again.