Buy Alert: CVS Health (CVS)

By Jim Pearce • January 26, 2017

TRADE INSTRUCTIONS
Date: January 26, 2017
Name: CVS Health Corp.
Symbol: CVS
Type: Open
Limit: Buy below $82

TRADE TARGETS
Holding Period: 4 months
Target Return: 12.2%
Annualized Return: 36.6%
Target Price: $92
Stop Loss Level: $74

COMPANY DESCRIPTION
CVS Health provides integrated healthcare services through its 9,600 retail pharmacies and 1,100 walk-in medical clinics located mainly in the U.S. It also manages pharmacy benefit programs for 80 million plan members. Link to company website.

TRADE RATIONALE
It’s been a tough six months for CVS stock, falling nearly 20% after cresting above $98 last August. Now trading around $80, it is one of the few S&P 500 stocks priced lower today than it was the day before the presidential election in November. That is partly due to concerns that the Trump administration may also go after PBMs (pharmacy benefit managers) in its effort to reduce drug prices.

It’s one thing to fire off a tweet or two excoriating drug companies and their marketing partners, but something else altogether to re-engineer the regulatory morass that surrounds the massive healthcare distribution network. To the extent Trump does go after the pharmaceutical industry, I’m more inclined to believe that he will limit his reach to drug manufacturers that have moved overseas rather than include their domestic marketing partners as part of that effort.

Although its share price has declined recently, its cash flow from operations grew by 15% (YOY) during the most recent quarter and earnings grew by 23%, so my IDEAL Stock Rating System now rates CVS as a strong buy. It also scores highly according to our RPM’s growth+value formula due to its high growth rate of earnings combined with its high earnings yield and strong return on capital.

What that means is that pretty soon something has to give: Either the CVS share price will bounce back up above $90, or earnings growth will decelerate. We shall soon find out; CVS reports quarterly and year-end earnings in two weeks, at which time we should see its share price break out of its current trading range. I’m putting a four-month target holding period on this position to include its 2017 Q1 report in case there is confusion over what Trump’s true intentions are regarding drug companies in the weeks to come that may outweigh a strong earnings report in February.

NOTE: CVS is optionable

Stock Talk

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Larry Johnson

01/26/17 ‐ 2:26pm ET January 26, 2017 at 2:26pm ET

LAMO….Jim Pearce, you must have been reading my mind.
I just took a position in CVS this morning at $79.21.
I also picked up a couple of $80 March Calls on the cheap at the same time.
FYI….I had sold a PUT on this stock several weeks ago that just expired last Friday and did quite well with that trade as well. Let’s hope it does well over the next few weeks.

black arrow

01/26/17 ‐ 2:37pm ET January 26, 2017 at 2:37pm ET

Hi Larry,
I didn’t want ya to get caught up in existential aloneness; so I got a couple of those calls as well.
Thanks Jim for another solid trade suggestion,
and thank you Larry for establishing the ‘beachhead”
Cheers and success
gotta put on my Chauffer hat again

Jim Pearce

01/30/17 ‐ 10:22am ET January 30, 2017 at 10:22am ET

BA – what do you make of CVS chart action this morning? Looks pretty interesting to me.

Derek: Las Vegas, NV

01/26/17 ‐ 3:30pm ET January 26, 2017 at 3:30pm ET

Jim, aren’t you worried about CVS losing the tricare business to Walgreens? I think the loss will hurt the earnings growth. What are your thoughts?

Thanks!

Derek

Jim Pearce

01/26/17 ‐ 4:47pm ET January 26, 2017 at 4:47pm ET

I’m not worried about that, since it has been known for several months and is already factored into the share price and future earnings estimates. That was a low margin line of business to begin with, and Walgreen’s undercut them to win the contract so there wasn’t much profit left in it. At this point I think all of the bad news is factored into the share price, so just a little bit of good news should send its share price several percentage points higher. Fingers crossed!

greenmaster

01/27/17 ‐ 6:08am ET January 27, 2017 at 6:08am ET

Looks like the stock is heading south here lately. Better wait and see just how low it goes. K. Thanks.

Jim Pearce

01/27/17 ‐ 9:22am ET January 27, 2017 at 9:22am ET

We may find out very soon how much lower CVS can go, since its 50DMA is at $79 and its lower Bollinger Band is at $78. If it breaks down below both of those then there is intermediate term support at $75. But I think it is going to bounce of its lower BB and head back up towards its upper BB (currently a little above $84) as it heads towards its earning release date. If so, a little good news could push it into the upper 80s fairly quickly.

Chutei Varkey

01/27/17 ‐ 12:54pm ET January 27, 2017 at 12:54pm ET

CVS March 80 calls picked some at 1.40

Jim Pearce

01/30/17 ‐ 10:19am ET January 30, 2017 at 10:19am ET

Nice trade! Looks like that option traded at $1.70 this morning, with CVS shares up 1%.

Jim Pearce

01/30/17 ‐ 1:11pm ET January 30, 2017 at 1:11pm ET

Short interest in CVS surges; could go either way. If next earnings are good, could see a massive short squeeze. http://www.investopedia.com/news/cvs-health-short-interest-surges-234-cvs/?partner=YahooSA&yptr=yahoo

Abhijit D

01/30/17 ‐ 5:15pm ET January 30, 2017 at 5:15pm ET

Still a buy or wait.

Jim Pearce

01/31/17 ‐ 9:24am ET January 31, 2017 at 9:24am ET

Still a buy, but have a stop loss beneath it in case it goes the wrong way. Also, for options traders a straddle might work particularly well for this situation, given the stock is likely to move strongly one way or the other after next week’s quarterly report is released.

Derek: Las Vegas, NV

02/01/17 ‐ 4:48am ET February 1, 2017 at 4:48am ET

Good idea on the straddle…

Derek

black arrow

02/01/17 ‐ 9:09am ET February 1, 2017 at 9:09am ET

Hi Derek yesterday I exited a trade on SLW and quickly reversed to upside on buying a new call for March I think iot was here is one for you to look into JNUG

Derek: Las Vegas, NV

02/01/17 ‐ 3:20pm ET February 1, 2017 at 3:20pm ET

Ok, I’ll take a look. Thanks!

Derek

black arrow

01/31/17 ‐ 11:40am ET January 31, 2017 at 11:40am ET

HI AD,
This is not related to your question here but a diif question under general investing I saw it a couple of days back. I tried to get this out a little sooner but was having difficulties with my keyboard.
Cheers

Abhijit D

01/31/17 ‐ 12:43pm ET January 31, 2017 at 12:43pm ET

No problem BA … I will go back and look at your response.

Benyeh

02/02/17 ‐ 9:40am ET February 2, 2017 at 9:40am ET

Hi Jim,

CVS drops below 75 just now,
Do we need to close the position at 74?

Abhijit D

02/02/17 ‐ 10:15am ET February 2, 2017 at 10:15am ET

several downgrades. Glad i waited looking at the short interest article Jim posted. it dropped under lower Bollinger Band. will wait for Jim’s recommendation

Jim Pearce

02/02/17 ‐ 10:44am ET February 2, 2017 at 10:44am ET

No. I only enforce a stop loss at the close, and in this case you may want to wait until next week’s earnings release before closing it out anyway.

greenmaster

02/02/17 ‐ 10:16am ET February 2, 2017 at 10:16am ET

I tried 2 warn U all about CVS on the southbound train a few days ago. I feel sorry for U if u bought it at higher prices. One question I have about it, Could this sell off be part of the weak retail industry right now? Most stocks involved in any kind of retail are just getting hammered these days. Please advise. Thanks.

Jim Pearce

02/09/17 ‐ 9:46am ET February 9, 2017 at 9:46am ET

CVS released a solid quarterly earnings report this morning (http://finance.yahoo.com/news/cvs-health-reports-record-fourth-115500357.html). At one point the stock was up more than 2% in pre-market trading, but is slightly lower on the opening. Although CVS beat its earnings estimate, it came in low on top-line revenue but I believe that confirms the company’s decision not to undercut Walgreen’s low-ball bid on the Tricare contract. If the stock starts going positive, I think we could start to see the beginning of a short squeeze so this one could get interesting in a hurry. Stay tuned.

Jim Pearce

02/09/17 ‐ 2:25pm ET February 9, 2017 at 2:25pm ET

As I thought it would, CVS has turned positive for the day. I could be wrong about this, but I suspect the short sellers are going to start covering some of their positions in it since the earnings report did not come in where they were hoping it would. If that happens, we could see a quick run up into the low-mid 80s within the next week or two (upper Bollinger Band is at $85). The monthly options expire next Friday; right now the $77 call is trading for $1 with the stock at $77.30. If we get the kind of move I am expecting that option could easily double or triple in value over the next ten days. Just a suggestion, not a formal recommendation.

Frank B. Las Vegas

02/11/17 ‐ 4:52pm ET February 11, 2017 at 4:52pm ET

Thank you very much! Some best results. CVS FEB 2017 77.50 C -Bought to open c 21 @ .69 at 9:30 Sold at 9:57 at 1.04 A unexpected profit. I thank GOD and Stock Talk. Frank B

Jim Pearce

02/11/17 ‐ 5:05pm ET February 11, 2017 at 5:05pm ET

You’re welcome. Nice trade!

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