The year 2020 has seen wild swings in sentiment about CVS Health (NYSE:CVS), even while CVS stock has closely tracked the market.
Shares opened for trade March 31 at about $59. That’s down about 20% from $74, where they opened the year. Since March 25 they have gained 10%. But the S&P 500 is also down about 20% since the start of the year. It has moved up 7% in the last five trading sessions.
The confusion about CVS’s prospects is basic. It’s a retailer, which is bad. But it sells health supplies, which is good. It’s an insurer, which is bad. It’s focused on managed care, which is good.
Here’s how I think about CVS stock.
A Makeover Makes CVS Stock More Attractive
CVS separated itself for all time from its primary competitor, Walgreens Boots Alliance (NASDAQ:WBA), through some decisive moves made by CEO Larry Merlo. It became a “health store” — even dropping cigarettes to reflect the new direction. CVS bought Aetna to become a health insurer. It has also moved heavily into services with its HealthHubs.
What Merlo wants CVS to become is a managed care company with local outreach. Buying Aetna made it roughly as big as United Healthcare (NYSE:UNH), the largest insurer.
Competitors like Humana (NYSE:HUM), Cigna (NYSE:CI) and Anthem (NYSE:ANTM) are all much smaller in terms of revenue. The eventual model for CVS operations is Centene (NYSE:CNC), which has been profitable serving Medicare and Medicaid contracts.
I have been following these changes since they started. I have encouraged readers of InvestorPlace to buy the stock. I even convinced myself after writing about the HealthHub strategy last year. Until recently, that buy was under water.
Now analysts are starting to see what I’m seeing.
Larry and the Volcano
Merlo was only midway through his transformation when the novel coronavirus hit. CVS operations are at the center of the pandemic.
While other companies are shedding employees, CVS is hiring. But CVS isn’t hiring for a short-term hit, the way companies like Kroger (NYSE:KR) and even Walmart (NYSE:WMT) are. It wants to keep people, so while other companies are cutting pay, CVS is adding benefits.
Take the Next Step
What will happen, when we wake up from this nightmare, is that healthcare costs will have rocketed out of control. There are estimates premiums could rise 40% next year.
This is certain to increase demands that more people be put into Medicare. This turns out to be great for managed care companies, because the risks of young, healthy consumers are lower than for old folks like me.
CVS is configuring itself to compete for those larger contracts. Its HealthHubs will become the front line of primary care. Its pharmacy benefit manager, Caremark, will gain the ability to fight for lower drug prices. The next step will be Aetna alliances with imaging centers and hospitals to give CVS visibility into those costs.
UnitedHealth can compete here because of its size. Centene can because of its model. The other health insurers will only be able to offer lobbying. When consumers and businesses get the bills, that won’t be enough.
The Bottom Line on CVS Stock
The pandemic is accelerating changes CVS was already in the process of making.
Managed care works because it focuses on wellness. It tries to keep people with chronic conditions out of hospitals. When given the power, CVS can use formularies and preferences against rising drug prices.
When Washington demands reform, next year, CVS will be years ahead of any competitor in managed care. That makes CVS stock a buy, even without the pandemic.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CVS.