Over the past six months, CVS Health has been a great trade, beating the S&P 500 by 20%. Its stock price has climbed to $100.39, representing a healthy 26.4% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy CVS Health, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is CVS Health Not Exciting?
Despite the momentum, we’re swiping left on CVS Health for now. Here are three reasons why there are better opportunities than CVS, plus one stock we’d rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. CVS Health’s recent performance shows its demand has slowed as its annualized revenue growth of 6.3% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect CVS Health’s revenue to stall, a deceleration versus its 8.5% annualized growth for the past five years. This projection doesn’t excite us and suggests its products and services will see some demand headwinds.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for CVS Health, its EPS declined by 1.5% annually over the last five years while its revenue grew by 8.5%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
CVS Health isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 12.9× forward P/E (or $100.39 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
Stocks We Like More Than CVS Health
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
