Slumping CVS Is Still a Major Player

Julie Utterback: CVS remains one of the top healthcare picks, and we have three key points to highlight about it.

First, the Medicare for All threat looks like a very low-probability risk to us, and we would remind investors that the three key things that need to happen to make that a reality--Bernie Sanders winning the Democratic nomination, Sanders beating Trump in the general election, and the Senate flipping from a Republican majority to a Democratic supermajority--look like a very low probability in combination during this election cycle.

Second, relative to the other MCOs, CVS appears more insulated from the Medicare for All threat given its diverse operations, including its top-tier position in the retail pharmacy store space. However, as CVS invests in its HealthHUB concept and deleverages from the Aetna merger, investors are being asked to wait for earnings-growth acceleration.

Our third major point relates to another factor that's creating short-term uncertainty: the coronavirus. While we suspect those risks will be manageable for CVS in the long run, the ongoing outbreak could negatively affect the company, including its insurance operations, in 2020.

Overall, these risks have pushed CVS shares down to a substantial discount to our fair value estimate. While we do not take them lightly, we generally see these factors as creating an opportunity for investors to buy CVS shares at a discount, and we continue to like the firm's long-term competitive advantages in the healthcare sector.