Buying CVS

The Stay Invested portfolio was UP today: $635.65 (+0.59%)

Overall GAIN/LOSS YTD: +$4,207.04 (+4.10%)

Our benchmark index, the S&P 500 is UP Year-To-Date +6.95%

http://money.cnn.com/data/markets/sandp/

"The most important rule of Fly Fishing is; fish don't have eyelids. This lets them see predators.

Investors who seek less crowded trades are doing the same."

― Clay Baker/Kelly R.

(I'm attribute most of this quote to my cousin Kelly R)

CVS Health Corp

CVS might be the cheapest growth stock opportunity in the market. I've set a limit buy order at $65. However I'm willing to buy any between $64.50 - $66. CVS closed at $65.96 today. My valuation model shows that the intrinsic value for the stock is $123, which is above what the market is valuing the company at the moment. Consensus is $89 with a $106 high; so granted I'm pretty far out on the limb with this one; but with a 3% dividend, $2/annually, I'm willing to wait and enjoy the rewards.

CVS Health’s earnings over the next few years are expected to double, indicating a very optimistic future ahead. In November of 2018 CVS and Aetna completed their $69 Billion dollar merger while the stock was trading at about $80/share. The market seems to have either ignored this mega merger or thinks ill of it. The merger combines CVS' pharmacies with Aetna's insurance business, blurring traditionally distinct lines in hopes of lowering costs. In fact this consolidation in healthcare is coming fast from all sides as companies work to get ahead of government regulations and solve the rising cost of healthcare themselves. Recent initiative at all major health insurance companies, Apple, Amazon and a collaboration by Warren Buffet, Jamie Dimon and Jeff Bezos are all indications that corporate America is in a race to solve this pressing issue. The later are doing it to show that they can save their own companies a fortune through better, more efficient management of healthcare costs.

For customers the CVS/Aetna merger has tremendous potential to decrease drug costs and medical costs. With the merger the role of traditional pharmacy benefit managers (PBM's) is blurred and Aetna insurance customers can now get drugs and healthcare services directly at CVS locations nation wide. Eventually CVS will open the program to all. PBM's generate a tremendous amount of profit from the rebate programs that drug companies offer. The combined CVS/Aetna merger will enable the company to forego the rebates and focus on getting customers the most affordable drugs. Rebates on diabetes insulin are some of the most lucrative in the industry, especially for the latest insulin drugs. To maximize profits PBM's have negotiated for the latest drugs with the highest prices and highest rebates, which tend to benefit the PBM more than the customer or the insurance company. CVS and Aetna want to end this practice and have mapped out a solution that saves customers money while increasing CVS margins which is good for shareholders (individuals, pension funds, 401K's, etc). Think of this as getting fiscally and medically fit.

CEO Larry Merlo says CVS plans to open its first concept stores in 2019 that will focus on reducing medical costs. Recall in previous posts where I illustrated that the biggest costs and the fastest rising are hospital stays, emergency rooms and doctor visits. CVS has a plan to dramatically reduce those costs in their new concept stores where many services can be performed on a walk-in basis at significantly lower cost. The company currently operates about 10,000 stores and 1,100 MinuteClinics which provides instant scale for this operation.

Merlo outlined these primary focus areas for the initial launch:

  • Managing diabetes, cardiovascular disease, hypertension, asthma and behavioral health.

  • Optimizing and extending primary care at CVS' MinuteClinics to help identify and manage chronic diseases.

  • Reducing avoidable hospital readmission's by combining Aetna's clinical programs with CVS' stores to guide patients when they're discharged.

  • Managing complex chronic diseases, such as kidney disease.

I personally applaud all of these efforts. While our elected officials keep trying to create programs that cost more and deliver less, these initiatives by companies that are motivated to thrive are delivering real results at lower cost to patients right now.

Stay Invested,

Clay Baker

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved