The Prognosis for CVS is Strong

Sell a put write ahead of the company's February earnings

Healthcare stocks like CVS Health Corporation (NYSE:CVS) are going get a lot of attention during this presidential election. Here are just a few things Wall Street is watching:

  • Who is going to come out on top in the Iowa Democratic caucuses on Monday, Feb. 3? Will it be Bernie Sanders with his Medicare for All policy or someone with less radical ideas for change?
  • Is Congress going to repeal the health insurance tax (HIT) that is part of the Affordable Care Act (ACA)?
  • Is the ACA’s individual mandate going to survive after being deemed unconstitutional by the U.S. 5th Circuit Court of Appeals in New Orleans?

It’s uncertain what the answers to those questions will be. But what’s not uncertain is how much money health-insurance companies are making right now and how much they are likely to make in the future.

Healthcare spending continues to rise in the United States as the baby-boomer generation continues to age. And as more people have gained access to healthcare, CVS has been right there collecting its share of the profits.

Could CVS Beat Expectations Again?

Last quarter, CVS reported revenue of $64.8 billion — a year-over-year increase of 36.5% — and non-GAAP earnings per share of $1.84 — a year-over-year increase of 36.1%.

Results like these have helped CVS enjoy a stellar rebound in its stock price since early 2019, and according to Zacks Research, CVS’s average earnings surprise over the last two quarters was 7.57%.

Though the aforementioned healthcare debate could keep prices down, it’s worth remembering that no legislation has actually passed. If investors think CVS has a good chance of beating earnings and heading higher in the short term, there’s nothing stopping them from getting in ahead of earnings.

The healthcare discussion in the Democratic primary will also be out of the news cycle as Senator Sanders and Senator Elizabeth Warren leave the campaign trail for the impeachment trial.

How Much Would the Healthcare Debate Affect CVS Anyway?

In the chart below, you can see that CVS recently completed a bullish “wedge” pattern, bouncing off the $72 level. Funnily enough, CVS started its recent bounce after Senator Bernie Sanders took a brief lead in the Iowa polls. While other healthcare stocks fell, CVS was getting ready to head higher.

Daily Chart of CVS Health Corporation (CVS) — Chart Source: TradingView

CVS does own Aetna, Inc., the private insurer. But it is also a pharmacy, a small retail store and a health services provider. Through its MinuteClinic, it provides care services, and it is expanding the services it offers with HealthHubs.

Investors selling a bullish put write position can be sure that CVS has plenty of fundamental strength, and it would be less affected by major changes to the insurance system than other healthcare stocks.

The $72 level that acted as support recently would make an excellent strike price, and options in mid-February or later will provide a decent premium.

Remember, CVS reports earnings on Feb. 12, so put premium for later February options may be inflated slightly. If you take advantage of that by selling a put with an expiration past Feb. 12, make sure you are prepared to exit ahead of earnings.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of, as well as the co-editors of Strategic Trader.

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