One of the hardest things for investors with the market at these high levels is finding value. When stock indices are at or close to record highs, “cheap” usually means “problematic.” There are two approaches to finding value in that situation. You can look for a sector or industry where the potential problems are overstated, or you can look for an individual stock that has solid growth and growth potential. CVS (CVS) fits into both categories, which is why even with recent gains, it is one of the best value stocks out there.
I last wrote about CVS back in early September, when I said that it was a good pick to cut through all the noise around trade, the Fed, and politics. It is quite sad that the same noise is still with us now, months later, but it is, and the same argument applies for CVS now that applied then: fundamentals matter.
Third quarter earnings, released a couple of weeks ago, confirmed once more what I wrote then, beating estimates for both EPS and revenue. CVS’s strategy of creating a vertically integrated healthcare company is paying off in a big way. Their move into healthcare provision through the opening of “Minute Clinics,” along with the acquisition of pharmacy benefit manager Caremark in 2006 and insurer Aetna in 2017 has built a healthcare company that covers, and therefore profits from, patients’ every need.
They are taking that concept one step further now with the move into what they call HealthHUBs, retail stores that dedicate around twenty percent of floorspace to health services. The concept, which underwent a trial run in the Houston area, has been very successful, and plans to expand it have been ramped up. CVS plans to have 1500 HealthHUBs operating by 2021.
You would think that that kind of success story and rapid expansion would be priced into the stock but, despite jumping over twenty percent since that September article, CVS still looks like a value play with a forward P/E of only 10.5.
In part that is because it is still playing catch up after collapsing around a year ago as doubts about the Aetna acquisition dominated the narrative around the stock, but there is something else that has undoubtedly held CVS back.
In case you haven’t heard, there will be a Presidential election next year. The Democratic primary, as primaries so often do, has included a lot of talk about radical plans, particularly for healthcare. Medicare for all has become a catchphrase and a rallying cry on the left, but what it actually means depends on who you ask.
The fact is though, as Barack Obama knows all too well, radical changes to the U.S. healthcare system are hard to make. Even if you assume a Democratic victory in 2020, which is not guaranteed by any means, it would need either Sanders or Warren to win the primary and be able to force radical change through Congress for there to be real disruption of the healthcare industry. Whether you think that would be a good thing or not, betting on it seems like a bit of a long shot.
So, with minimal political risk, the CVS story comes down to how you feel about their growth plans. The evidence so far indicates that they have it right and are in the process of a quiet revolution in healthcare that will benefit them enormously. Once again, it seems, the market punished a company for placing long-term investment over short-term profit, but that just makes for better value for long-term investors. As a result, CVS is still great value.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.