CVS (NYSE:CVS) stock has been beaten and bruised in 2020, mostly because a weak macroeconomic backdrop and depressed consumer spending — both brought on by the Covid-19 pandemic — have created depressed sentiment across the entire retail segment Year-to-date, CVS stock is down 14%.
But CVS’ fortunes could change, in a big way, over the next six months thanks to one catalyst: the flu.
Specifically, the emergence of the world’s first flu season in a post-Covid-19 world could spark sales growth acceleration at CVS in the second-half of 2020 as consumers rush to drug retail stores to both stock up on cold and flu medicines and get their flu vaccines.
This meaningful growth acceleration will converge on what is a significantly depressed valuation on CVS stock — just 9-times forward earnings — to spark huge gains into the end of the year.
To that end, I think CVS stock is a strong buy on this dip for a near-term trade over the next 6+ months.
Here’s a deeper look.
A Big Flu Prepping Season
The bull thesis on CVS stock rests on one simple idea: The 2020/21 flu season will be accompanied by more flu vaccines and more flu medicine bulk buying by consumers than ever before.
Thanks to Covid-19, we are now all quasi-obsessed with staying healthy and not getting sick. Disease, vaccine and medicine awareness has never been higher in the history of the world.
Elevated awareness on that front will inevitably transfer into elevated demand for sickness prevention methods.
Over the next six months, in preparation for flu season, consumers are going to rush to drug retail stores to stock up on flu and cold medicines, and get their flu vaccines. I don’t doubt that market sales in these verticals in the second-half of 2020 will hit record highs. By a mile.
That’s great news for CVS, the largest drug retailer in the U.S. The company commands 20%-plus drug retail market share in most major U.S. metro areas.
The implication therein is obvious.
As consumers rush to drug retail stores to bulk prep for flu season, they will do most of that bulk prepping at CVS stores, especially at those CVS stores which have been upgraded with HealthHUB services.
CVS’ revenue growth trends will meaningfully accelerate in the second half of 2020. Profit margins will improve with increased scale. Profits will charge doubly higher. And the whole CVS growth narrative will fire on all cylinders.
CVS Stock Is Too Cheap
If the whole CVS growth narrative does fire on all cylinders in the second half of 2020 on bulk flu season prepping, then CVS stock will rip higher. Not by a little. By a lot.
Why? One word: valuation.
CVS stock is dirt cheap today. I’m talking 9-times forward earnings, 0.3-times trailing sales, 5-times cash flow, 1-times book with a 3.1% dividend yield. Across the board, those multiples represent the cheapest it has been in the past decade.
What happens in the market when accelerated growth trends converge discounted valuations?
You get huge rallies.
CVS stock will be no exception to this trend. As accelerated growth trends in the back-half of 2020 converge on what is essentially all time low valuation in CVS stock, shares will rip higher. My numbers suggest upside to $80-plus prices is possible.
The 2020/21 flu season will have more awareness and attention dedicated to it than any other flu season. Ever. This unprecedented awareness will inevitably translate into unprecedented demand for flu prevention and treatment, including the bulk-buying of flu/cold medicines and mass uptake of flu vaccines.
CVS, as the leading pharmacy retailer in the world, is optimally positioned to benefit from this unprecedented demand surge.
More importantly, CVS stock — as one of the cheapest stocks in the market today among household names — is optimally positioned to rip higher on the back of this demand surge.
As such, I think CVS stock is a strong contrarian buy on the dip in August. I see shares running towards $80 by December.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.