The stock markets may be up about 20% on average in 2019, but CVS is down that much this year so far, and down 34% since mid-November. There are reasons to be hopeful though.
Investors love buying hot stocks, at least the armchair ones. There is a lot to be said about buying a stock that just keeps going up, as long as you are ready to jump off at the right time.
This is actually more of a traders’ game than an investors’ one, because traders are only in for it for the ride up, and will leave when it stops, at least the ones that are paying attention and have the resolve and skills to do this properly. After a stock has run up, and it stalls, traders line up to get out, and this profit taking can send a stock in the other direction pretty easily.
From there, it might rebound and re-test its highs, or it might not. Some stocks never make it back up, while others may take a long while to get there. In the meantime, if you came to the party too late, and often people do, they may have to sit in a stock for a long time just to get out of the red with it.
A good example of this would be the way CVS performed during the first half of this bear market, and if you bought it around 2009, when the bull market started, you could have held on to it all these years and still doubled your money in 10 years. This is below the market average of tripling it, but still provides a nice average return of about 20%, nothing to sneeze at to say the least.
CVS really took off during the first 6 years of this bull market, and made it from $24 all the way to $112 in 2015, before peaking and sliding downward since then, sitting at $52.81 now. If you had waited to buy it after it had run up too far though, and kept it, you could be sitting with a big loss and need the stock to take off again like it did when you bought it to get out of the hole. That may not happen for quite a while.
Investors therefore needed to buy earlier in the move, where traders could have entered much later and still got out with a nice profit. This was also a classic head and shoulders play, where once it peaked and went below $90, even position traders with any sense who can hold a stock for a couple of years or more would have seen this breakdown if they had much trading sense at all.
After we’ve given up as much as we have since then, and sit at less than half where the stock was not that long ago, if the prospects of the company from a business perspective start looking up, this is the time that investors need to start keeping an eye on things.
It doesn’t matter how well or better a company may be doing if the good news doesn’t make it to the stock, especially when it is mired in a downward momentum like CVS stock is. It doesn’t matter who tells you that this is a good buy at current levels, people that spend their time analyzing the business performance, the fundamentals of the company and the stock, if things haven’t turned around on the charts yet. CVS hasn’t, but might at some point in the near future.
Value Plays Require an Ear to the Ground
When we invest this way, called a value play, we also need to be careful not to let our predictions of the stock’s bullishness be clung on to past the point where they are no longer valid. If a stock starts moving up and we buy it, expecting it to go higher, and it ends up moving back down, we cannot stick around even though we may hope that things will go our way. It’s fine to hope, but when we are down to hope, it is time to leave, especially with bottom plays like this one may end up being.
A good example of this would be buying the dip that looked like it was ending in late 2016, when it moved down by 30% over the past 8 months. It started 2017 at $82.20 and didn’t go much higher, but it did go a lot lower eventually, and you’d be down by $30 a share today if you kept it.
It’s perfectly fine to miss on an investment, and this is one of the most important lessons to learn, as long as you limit your losses. It didn’t take that long for this trade to show itself as the dog it was, and we could have exited with a pretty small loss once we saw that this wasn’t quite the move that we hoped it would be.
The best traders lose in trades as often as they win, and they never see a loss or even a string of them as anything to become too concerned with, because when they lose, they insist on losing small. Investors can afford to lose more since they make more, but if we get to the point where you should cut your losses but don’t, because you hate to lose, you are inviting losing to dinner at this point.
Now, in spite of CVS trading at a low that we haven’t seen it in 6 years, it might be ready for another look. CVS are America’s biggest drug store chain, but being the biggest and remaining there doesn’t mean that your stock will do well all the time, and the last few years have been pretty terrible for this stock actually.
CVS Appears to Be Looking Up
They are making positive changes to their business, and while this in itself does certainly matter, it only matters if this is confirmed by the movement of the stock in question. So far, CVS is still laying on the floor face first as far as its stock goes, and it will need to at least start to raise itself up before we really want to be putting any money on them.
Their earnings have been nothing to write home about over this bearish period, and this will need to improve, although we don’t necessarily need or want to wait until it does. If the voting with the stock shows signs that the market has enough confidence in them to improve, that in itself is what we’re really looking for, as the hope that people have is now being confirmed by those who matter, the only ones that matter in fact.
Declining margins has been weighing heavily on CVS, so they have been looking elsewhere to expand, and plan on expanding things laterally to boost their pharmacy business. People now go to CVS for health care, which the company is looking to expand, and this bringing in more clients means more prescriptions written and bigger profits.
CVS also owns Aetna, a health care benefits provider, as well as CVS’ Caremark division which negotiates prices on a group level with drug makers. These two units are expected to deliver 60% of the company’s profits in 2019, with only 40% coming from their stores. Retail may be beat up, but if you diversify, it may not matter.
CVS is also planning on really ramping up their care delivery, and is expected to spend a lot of money to expand this part of their business. The retail pharmacy end of things, once the whole ball game for them, isn’t shrinking, but these new products are breathing new life and new profits into the company and the plan is to escalate this further.
It’s predicted that CVS will generate $9 billion in free cash this year, so they will have plenty of money to spend on growing the business, and that is clearly their intent right now.
This may not sound much like a stock that is sinking into the ground, but if the market ends up treating its stock like it has been, it will continue to do so, exclusive of anything. The mood may change at some point soon though, and when it does, it might then be worthwhile to jump on the bandwagon, after it starts moving down a better road.