CVS Health Corp (CVS)

He is all over the healthcare sector right now. They remind him of the US financials 2-3 years ago. Everybody hated them, too much regulation, etc., etc. It might get worse before it gets better. If you have a 2 to 4 year timeframe, it is now time to look at a number of healthcare names. He likes this one as well as Express Scripts (ESRX-Q), Zimmer Biomet (ZBH-N), etc. Very cheap valuation.

It has not done particularly well recently but has been a good long term performer so now is a good entry point. Demographically it is a good place to be. 98.8% of prescriptions are covered by benefits. (Analysts' Target: $87.72)

They came out with some news that knocked it down. It is an incredible company for health care reform. Short term it is pain, but he thinks it will come back.

(A Top Pick Dec 17/15. Down 19.33%.) Encountered some competitive pressures in their last quarter on the retail/Pharma side. They are projecting that next year they are going to lose about 40,000 scripts. She is projecting that earnings maybe flat to 5% upside next year. In 2018 they plan to resume a growth rate at 10%. Trading at a very attractive multiple now at about 12.5X forward earnings.

He was quite surprised at such a blue-chip name getting hit so hard this week. In their conference call, they announced that they were lowering guidance going forward. They are really in a prescription-fill and price war with Walgreens. They expect 40 million prescriptions to go elsewhere this year. A very difficult space to be in.

This owns a pharmaceutical benefits manager division and a number of other assets. It is a wonderful business. Every year they raise their dividend, buys back stock and grows its earnings. All the pharmaceutical benefits managers are under pressure right now because of worries about drug pricing and how they make money. This one has been absolutely slaughtered. Trading at a multiyear low in terms of valuation. 2-3 years from now, it will be materially higher that it is today.

It is getting hit because of the pharmacy benefits space. They are getting squeezed from pressure to lower prices on drugs. Their margins on these drugs are going down. Revenues are going to deteriorate. The pressure won’t abate no matter who gets in. He prefers Walgreens.

He has owned it in the past. There is pressure on their operating margins. This year you could not fault any health care name for going down. Wait for November 8^th. It doesn’t matter who gets in. He thinks they will be a strong performer in the fourth quarter of this year.

(Market Call Minute.) The company has done a pretty good job in cutting costs. The stock is behaving well relative to retail. It is a defensive name. He is less interested in consumer discretionary, and more interested in tech, healthcare, financials and energy.

(Top Pick Nov 25/16, Down 5.83%) They are different from regular drug retail. She thinks they will still maintain their 14%+ annual earnings growth. They bought all the Target pharmacies. She likes it here. It is at a historical low.

Drug retail in the US is in a very tough spot. Looking at the number of pharmacies needed versus how many you’ve actually got, you have 34% more than needed. There are so many pharmacies, and margins have gotten so large in pharmacies that insurers are now coming into a geographic area and getting lower bids on their dispensing margins. He sees a steady, annual re-rating of gross profits in pharmacies, and the dispensing margins staying under pressure. Valuations are not very attractive at the current time.

It was a top pick last month. It has come off since then so he would be a buyer. They are a pharmacy benefits manager and they own 800 clinics.

CVS (CVS-N) or Walgreen Boots Alliance (WBA-Q)? This one has Caremark, a pharmacy benefit manager, which makes up about a 3^rd of their business. Over the past few months, this has caused him a little concern. It is not as transparent in terms of pricing, and a lot of the PBM’s are hiding behind competitive advantage and not wanting their competitors to know what their pricing is. He likes them both. This one is a little cheaper.

Biggest retail pharma in the US. 20+% dividend growth for 7 years. He expects at least 16% dividend growth going forward.

For some reason, this is being pressured along with the rest of the healthcare space simply because of the potential regulatory changes that may be revised. Even if they do, this company is one of those great business models that is both combined Retail/Pharma as well as Pharma Benefit Management. It has great margins relative to its peer group. Also, demographics are really promising. 8% of the consumer wallet is spent on healthcare, and that is going to be growing to north of 14%-15% in the years ahead. Dividend yield of 1.82%.