Drug store giant CVS Health (CVS) - Get Report reported better-then-expected second-quarter earnings and raised full-year profit guidance. My call is to buy the stock now and add to positions on weakness to its quarterly value level at $50.10 as the turnaround story gains traction.
CVS closed Tuesday at $54.08, down 17.4% year to date and in bear market territory down 23.1% below its 2019 high of $70.32 set on Feb. 19. The stock set its 52-week low of $51.72 on May 17 and is 4.6% above this level. Longer-term the stock set its all-time intraday high of $111.65 during the week of July 31, 2015. The stock is fundamentally cheap with a P/E ratio of 7.76 with a dividend yield of 3.59%, according to Macrotrends, which supports my view to buy now.
The stock is in the process of reversing a negative technical profile on its daily and weekly charts. The daily chart shows that the stock has been below a "death cross" since Jan. 30, and the negative weekly chart shows the stock significantly below its "reversion to the mean."
CVS has now beaten earnings-per-share estimates for 14 consecutive quarters so disappointing guidance has held back the stock until now. The turnaround story began on Nov. 28, when Aetna announced the CVS deal to buy it had been completed setting the stage for CVS to become "the nation's premier health innovation company."
CVS no longer sells cigarettes and opened walk-in Minute Clinics in about 10% of its locations which will be expanded. In 2019, CVS Pharmacy locations are being revamped and the focus is on prescription benefit services, personal care products and additional Minute Clinics.
Politics is also a factor as some on Wall Street say that Medicare-for-All has made the drug market quite volatile in recent months. Despite this uncertainty, CVS is optimistic that its strategy will provide a platform to serve consumers across America. Let's hope that Congress and President Trump can come together and look to the private sector for improved Healthcare-for-All.
One initiative is expanding its membership program called CarePass. The pharmacy filled 19% more prescriptions in the second quarter and sales of over-the-counter health products also improved. Aetna health insurance sales also beat revenue estimates.
The Daily Chart for CVS Health
Courtesy of Refinitiv XENITH
The daily chart for CVS shows that the stock has been below a "death cross" since Jan. 30 when the 50-day simple moving average fell below the 200-day simple moving average to signal that lower prices lie ahead. This tracked the stock to its 2019 low of $51.72 set on May 17. The close of $65.52 on Dec. 31 was an important input to my proprietary analytics and its annual risky level remains at $106.84. The close of $54.49 on June 28 was another input to my analytics. This resulted in quarterly and semiannual value levels at $50.10 and $42.73, respectively. The close of $55.87 on July 31 was an input and the monthly value level for August is $34.42. The 50-day and 200-day simple moving averages are $54.97 and $61.46, respectively.
The Weekly Chart for CVS Health
Courtesy of Refinitiv XENITH
The weekly chart for CVS will be upgraded to positive given a close on Friday above its five-week modified moving average at $55.75. This would target 200-week simple moving average or "reversion to the mean" at $77.72. The stock has been below the 200-week SMA since the week of Nov. 4, 2016. The 12x3x3 weekly slow stochastic reading is projected to uptick to 51.00 this week up from 50.22 on Aug. 2. During the week of April 26 this reading was 9.71 which was below the 10.00 threshold making the stock "too cheap to ignore."
Trading Strategy: Buy the stock now and add to positions on weakness to quarterly and semiannual value levels at $50.10 and $47.73. Reduce holdings on strength to the 200-day simple moving average at $61.46.
CVS Health is a holding in Jim Cramer'sAction Alerts PLUS Charitable Trust Portfolio.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on July 31. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.