CVS looks poised for a big break out - here’s why

May 30, 2018

CVS looks poised for a big break out – here’s why

Looking for a new investment to make can be an intimidating process, no matter how experienced you may be as an investor. There are so many ways to go about doing it, how are you really supposed to know what method works best?

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Some investors prefer to take a long-term view, focusing on detailed analysis of a company’s financial reports, income statements and balance sheets to make an educated guess about how much they think the stock should be worth. Often called value investing, it’s an approach favored by some of the most famous and successful investors of all time, including Warren Buffett and his mentor, Benjamin Graham.

Others, taking a shorter-term view, prefer to focus on the swings between high and low points that stock prices make in an attempt to time the next swing. That approach relies on the technical ability to recognize peaks and valleys and define trends across multiple ranges of time to forecast both the timing and the size of the next move.

What most investors don’t do is to combine both approaches; by and large investors tend to fall into one approach or another. When you do take a little extra time, however to use both methods, you can sometimes uncover opportunities that most other investors will simply pass by. The stock I’m highlighting today fits that description. Here’s why.

Fundamental and Value Profile

CVS’s fundamental profile is very strong. By just about any common fundamental measure,  the company’s business is on very solid ground.

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  • Earnings and Sales Growth: Over the last twelve months, earnings grew by more than 25%, while sales grew modestly. This is an indication of management’s ability to maximize profits.
  • Free Cash Flow: Over the last twelve months, Free Cash Flow has declined by almost 50%, but remains very healthy at almost $5 billion as of the company’s most recent earnings statement.
  • Debt to Equity: the company’s debt almost tripled over the last twelve months. Almost all of that increase is attributable to the company’s announced acquisition of Aetna, Inc., an aggressive move to expand and diversify its business beyond the pharmacy business.
  • Dividend: CVS pays an annual dividend of $2.00 per share, which translates to an annual yield of 3.08% at the stock’s current price.
  • Share repurchases: In November, 2016 the company announced a the repurchase of $15 billion worth of its common shares. As of the latest earnings report, CVS had spent only $1.1 billion of that planned amount, with $13.9 billion remaining. Stock buybacks serve to decrease the number of available shares in a stock, which usually helps to provide support to the stock’s price over the long term.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for CVS is $38.04 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.70. The stock’s historical Price/Book Ratio is 2.5, which is 47% above its current level. If the stock rallied to par with that historical average, its price would be $95 per share, a level the stock last saw in August of 2016.

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Technical Profile

Forecasting a long-term target price of $95 for this stock sounds impressive, but one of the other elements of effective analysis is looking at a stock’s trend and price activity. This type of technical analysis helps to provide an informative context for the stock’s current status in the market as well as to consider the stock’s potential for useful gains in the future. Here’s a look at the stock’s latest technical chart.

  • Current Price Action: Over the last four weeks, the stock has shown some short-term bullish strength, rallying from a two-year low at around $60 per share. The dotted blue lines on the chart above are drawn at levels where the stock has recently found significant support, first from around the previously observed $60 level and again right around the stock’s current price. The stair-step pattern marked by the letters A, B and C also indicate the existence of a short-term upward trend and provide a strong basis for the stock’s likely ability to maintain that trend’s bullish momentum for the immediate future. The dotted red line at around $69 is where the stock’s next most likely peak is likely to occur if the stock should again bounce off of its latest support level.
  • Trends: The long, diagonal red line traces the stock’s trend dating back to October of last year, which marks an intermediate-term downward trend. This also falls in line with the stock’s long-term trend, which has also been following a steady decline from a high point at around $107 two years ago.  The upward sloping green line running through the stock’s upward rally in April from $60 to $69 marked the most recent short-term trend line and helps to define the latest rally’s likely reversal points. If the stock can break the resistance shown a little above $69 per share, it would mark a major trend reversal point that should propel the stock to minimum intermediate high point at around $84 to $85 per share. That is below the $95 target I previously identified using Price/Book analysis, but still nearly 31% above the stock’s current price.

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