We recently compiled a list of the 10 Most Undervalued Large Cap Stocks To Invest In. In this article, we are going to take a look at where CVS Health Corp. (NYSE:CVS) stands against the other undervalued large cap stocks.
Are Cyclical Stocks The New Investment Strategy?
As significant gains are already being realized after the Fed’s aggressive September interest rate decision, historical trends suggest that markets typically remain flat or slightly up in the 30 to 60 days following the first rate cut. Positive factors contributing to the current rally include a strong internal market dynamic, with a large portion of the S&P 500 trading above their 200-day moving averages, and optimism surrounding the stimulus measures from China.
At such a time, investors are cautioned against assuming certainty in market outcomes. They are advised to consider protective strategies, such as exploring shorter-duration bonds as a hedge against potential rapid rate cuts by the Fed. Overall, focusing on sectors with strong fundamentals while remaining adaptable can help investors navigate economic uncertainties. Liz Young Thomas, SoFi’s head of investment strategy, holds a similar sentiment. We covered her opinion in our article about the 8 Most Active US Stocks To Buy Now, here’s an excerpt from it:
“When discussing valuation concerns, Young agreed that while US market multiples are relatively high, hovering around 21 to 22, this is not unprecedented when compared to historical standards. She pointed out that current valuations are above both the 5-year and 10-year averages but not at overbought levels… Young expressed a desire for the market to shift towards trading based on fundamentals rather than multiple expansions. She noted that while earnings stability is crucial, there are signs of strength in sectors outside of technology, particularly in industrial stocks… As for identifying sectors with potential for faster earnings growth, Young emphasized the importance of thorough research and analysis rather than relying solely on top-down market movements… she advised investors to remain vigilant and consider protective strategies. She suggested exploring opportunities across the Treasury curve, particularly in shorter-duration bonds, as a hedge against potential faster-than-expected rate cuts by the Fed. ”
Scott Chronert, Citi US equity strategist, joined CNBC’s ‘Squawk on the Street’ on October 2 to discuss his assessment of the major averages and stocks to end the year and how investors should lean into growth and cyclicals to manage potential market choppiness.
Scott Chronert set a target for the S&P 500 at 5,600. As the market entered October, significant global events have unfolded, including stimulus measures from China and ongoing geopolitical tensions marked by strikes in the Middle East. Chronert acknowledged that while these developments are crucial, translating them into actionable investment strategies has proven challenging, particularly in light of the ongoing conflicts involving Russia, Ukraine, and Israel.
Addressing the geopolitical landscape, he noted that the situation in the Middle East remains unpredictable and continues to be a wild card. This uncertainty has prompted a tactical shift towards an overweight position in energy stocks as they enter the fourth quarter, suggesting that rising tensions could benefit this sector. However, he characterized this move as somewhat contrarian given the current market climate.
When discussing monetary policy, Chronert indicated that the Fed is still in a less restrictive mode and has not yet reached a point where it can be considered fully accommodative. The focus is on balancing growth while adopting a defensive stance as the year concludes. This approach includes an overweight position in financials while avoiding more defensive sectors that are historically viewed as expensive. He pointed out that healthcare is somewhat of an exception to this trend, but overall, there is no urgency to invest heavily in traditionally defensive sectors.
The conversation also touched on the Fed’s role in achieving a soft landing for the economy. Chronert believes that if the Fed continues to lower interest rates, as indicated by market expectations of potential cuts totaling up to 200 basis points, it could create a favorable environment for equities. However, he acknowledged that markets have misjudged Fed actions in the past.
The discussion raised concerns about potential risks facing both monetary policy and economic performance. Chronert emphasized that the greater risk lies in the Fed needing to stay ahead of economic narratives rather than falling behind. A deterioration in labor conditions could lead to further rate cuts; however, he cautioned against viewing this solely as negative for equities. Instead, he sees potential risks related to inflation stemming from rising commodity prices due to geopolitical tensions.
Looking ahead to 2025, he expressed concerns about how ongoing discussions regarding deficit financing might impact markets, particularly regarding bond market dynamics and potential pressures from bond vigilantes. He noted that while immediate risks may seem manageable, longer-term implications could arise from political developments surrounding US elections.
Additionally, he suggested that markets could see supportive conditions with expectations of rate cuts, potentially 50 basis points in November while expressing contentment with either 25 or 50 basis points as long as the overall trajectory remains constructive.
Analysts are increasingly optimistic about large-cap stocks, viewing them as a strong investment choice amid current market volatility. Scott Chronert’s assessment aligns with this perspective, as he suggests that leaning into growth and cyclicals could be beneficial for investors navigating the choppy end-of-year conditions. With their stability and potential for steady dividends, large-cap companies are well-positioned to weather economic uncertainties and geopolitical tensions, making them a reliable option for those looking to maintain a balanced portfolio.
Methodology
We used the Finviz stock screener to compile a list of 25 stocks trading over $20 billion, that’s our definition of large-cap stocks. We then selected stocks with a forward P/E ratio under of 15 and made a list of 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A row of shelves in a retail pharmacy, demonstrating the variety of drugs and over-the-counter products.
CVS Health Corp. (NYSE:CVS)
Forward Price-to-Earnings Ratio: 8.47
Number of Hedge Fund Holders: 60
CVS Health Corp. (NYSE:CVS) is the world’s second-largest healthcare company that operates a network of retail pharmacies, offers pharmacy benefit management services, and provides healthcare services through its MinuteClinic walk-in medical clinics. It also owns and operates the health insurance company Aetna, and is committed to providing accessible, affordable healthcare solutions to individuals and communities across the US.
The company is doing well because it’s becoming a more integrated healthcare provider. It’s expanding its MinuteClinics and improving its telehealth services to offer more convenient care, attracting new customers. It also bought Aetna, which allows it to offer more complete care solutions. This is in line with the trend in healthcare towards value-based care, which focuses on better patient outcomes and long-term growth.
The company serves almost 187 million people. More people are using Aetna medical plans through CVS pharmacies, and Caremark now covers 13.8 million Aetna members. It lowered its earnings forecast for the whole year because of challenges in its insurance division, Aetna, making this the second time they’ve lowered the forecast for 2024. However, the company’s revenue still grew by 2.6% in Q2 2024, partly attributed to the successful launch of CVS CostVantage.
Management expects to improve its profit margin in the Medicare Advantage segment by about 110 basis points in 2025. This is within its goal of 100 to 200 basis points. The company also expects a 5% decrease in Medicare Advantage members and $500 million in cost savings.
CVS Health Corp. (NYSE:CVS) is doing well because of its new ideas and how it combines different healthcare services. It’s growing faster by using transparent payment models, using more biosimilars, and improving patient care through its connected healthcare assets.
Coho Relative Value Equity Strategy stated the following regarding CVS Health Corporation (NYSE:CVS) in its Q2 2024 investor letter:
“While we believe each of those companies is performing in line with or better than our expectations and that the moves lower are unjustified, both CVS Health Corporation (NYSE:CVS) and Nike reported disappointing performance in recent results. In CVS’ case, management gave an optimistic outlook to 2024 at its December Investor Day, which we believed was consistent with our expectations. Unfortunately, management misestimated its medical loss ratio and the anticipated profitability in its book for Medicare Advantaged lives. This triggered a position paper violation, as the company’s financial flexibility now looks constrained in both 2024 and 2025.”
Overall CVS ranks 10th on our list of the most undervalued large cap stocks to invest in. While we acknowledge the potential of CVS as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CVS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.