CVS Health Corp (CVS-N)

Company fundamentals are challenging. On paper, looks like a good model. But in practice, fail after fail. Overhang of healthcare malaise. Doesn't matter what the price is, you need fundamental quality to create value. Pass.

Weak technical structure. 200-day MA falling, and stock price is below that. Longer-term weekly charts look just as tough. Earnings are tough in physical stores. Trump's (perhaps empty) threats to remove middle benefits management has impacted stock. Good yield at 5.81%, but how secure is it?

Keep a close eye on it, as technicals are telling you that things could get worse.

It's been problem after problem for them. Theft is forcing them to lose market share to Amazon. They're closing their worst-performing stores, opening health clinics and double-down on their non-drugstore businesses like Aetna and health insurance benefits manager. They have more than 900 medic clinics and 200 Oak Street health clinics. (Walgreens is reducing their clinics and Walmart got rid of all their clinics, because they can't find workers.) CVS bought Aetna 6 years ago, but managed care providers have been struggling for 1.5 years as people catch on post-Covid surgeries, which means paying out for those procedures. Meanwhile, Aetna dropped the ball on Medicare advantage plans for seniors; the plans were too cheap, which attracted many more customers, so people are using more healthcare services as the government is getting stingier with payments. Poor performance forced the CEO to be fired last October. Shares down -25% in December alone (healthcare stocks have fallen out of favour since the election and the Humana CEO murder). Then, Trump threatens to cut out the middlemen in health insurance. Just two days ago, the Justice Department slapped them with a lawsuit over controlled substances, which he thinks is damning. Their balance sheet is weak.

He sold it 3 months ago after holding it a long time. Shares keep falling. They fired their CEO. On paper, this stock looked good--reasonable valuation and good growth prospects, but they could never execute. There was always one piece in the vertical integration that failed them. That's why he left. The shares look cheap now, but can get cheaper. This is a value trap.

Not only pharmacies, but offer health insurance, home care, pharmacy benefits management. CVS is the best-positioned healthcare company in the US. Trades at only 10x PE and pays a 5% dividend yield. He expects double-digit earnings growth in coming years despite the soft retail environment. Problems with Medicaid reimbursement should ease with the new administration and looser regulation.

It has taken one step forward and two steps backward for some time. The insurance business and pharmacy stores are holding it back. Only 75% of its stores are profitable. There are offers from Walmart and others to provide same day delivery services and this takes business away from CVS.

Recently bought. A laggard with a low valuation. A better choice than high-flying names.

Many headwinds, too big to overcome. Sell, take the loss.

He is expecting some relief on the regulatory side with less competition. It has a solid dividend yield and lots of cash flow. The stock looks cheap but the earnings are flat-lining.

200-day MA moving lower, stock price is below that. Basing since May. Retail side is the issue. Declining foot traffic, people are buying online. Integration problems with its various businesses. Earnings growth looks weak. 

He prefers growthier names, drug distribution, and traditional pharma like BMY.

They report Wednesday. Listen for what the CEO has to say. He has a big job, because CVS has very jumbled assets. He wishes him the best.

Still owns it and still believes has great assets. It's down because of management turnover and bad capital allocations, but it's fixable and the business is not dead. He has faith in new management.

They cut forecasts and changed their CEO. This continues to get punished (glad he sold it last spring). An aging population is cutting deeply into their margins. Recently, they were talking about breaking up the company. Let's see if the new CEO can right the ship.

Pharmacy side not doing well, as people are switching to online. Pharmacy benefits are doing OK. Basing since May. Seems to be trying to get above water; just today got above the 200-day MA. See if it stays there.

Long term, managed care might be where they'll be OK. Valuation discount in the stock price, but it's a value trap. 9-10x forward earnings, but growth rate is under 2%. He doesn't like to buy on activist shareholders getting in, because you don't really know what's going to happen. He buys based on numbers, with earnings growth in high single digits.