Stock of the Week
NYSE Symbol: CVS
Price as of 4/15/19: $54.22
The broader market continues to shine in 2019, up 15% year to date. However, with every bull market some sectors are left behind. This year's underperforming sector goes to healthcare, up just 4.4%. The sector with the best demographics going forward has been shunned by Wall Street this year with a number of blue-chip stocks like UnitedHealth Group, Walgreens, Cigna, and Humana trading near 52-week lows. This week's featured stock is also trading near its 52-week low after making a $71 billion acquisition of Aetna last year. The stock of the week is CVS Health (CVS). CVS and the rest of the healthcare stocks have been driven down by regulatory concerns, particularly regarding the politically charged Affordable Care Act. Healthcare might be a lightening rod in the next Presidential election as Independent Senator, Bernie Sanders looks to eliminate managed care entirely and replace it with a single government payer. While everyone wants pricing for healthcare to come down, making such drastic moves as Bernie Sanders has suggested would probably create more harm than good for the sector in the long run. And while this outcome is not likely, the healthcare sector is trading as if many of these changes will take place providing a buying opportunity for value investors and investors with a long-term time horizon.
With the recent Aetna acquisition, CVS Health is trying to revolutionize their industry while also diversify their business and profits. With 9,900 locations, 70% of the US population is within three miles of a CVS Health store. CVS is creating HealthHubs in their stores which can offer 80% of the services of a primary care physician. If successful, these hubs will only drive more business to their stores. CVS Health is also looking to expand their business while eliminating competition by acquiring urgent-cares and physician groups to man their stores.
In the near term, CVS will have to continue to digest the Aetna merger by reducing costs and paring down the debt which now stands at $71 billion. No one is expecting any dividend hikes or share buybacks any time soon, but the good news is CVS is generating over $9 billion in free cash flow a year. If investors have a one to two-year time horizon, CVS will hopefully right their ship while also creating a new business model to succeed in the 21st century. A lot of bad news has been priced into CVS Health's stock trading for 8 times reduced estimates, 0.3 times sales and 1.2 times book value. With a dividend yield of 3.8%, patient investors could be handsomely rewarded by the bold moves by CVS over the last year.
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