CVS Health (NYSE: CVS) is a top pharmacy retailer in the U.S., and over the years, it has been expanding its operations to go deeper into healthcare. The stock also provides investors with a dividend that yields 4.3%, which is more than double the S&P 500 average of 1.3%. Combine that with the stock trading at a fairly low 11 times earnings, and it looks like an investment that looks to be too good to be true.
But despite all of this, investors aren't rushing out to buy the stock. Year to date, CVS' stock has crashed 22%. What's behind all the bearishness? Is the stock in trouble, or is this just a great buying opportunity?
CVS stock gets punished for a steep adjustment to its forecast
On May 1, CVS released its latest earnings numbers, and that's when the wheels came off for the stock. It's one thing to miss expectations, but to drastically slash guidance is even more alarming to investors. When that happens, a sell-off often ensues. CVS' adjusted earnings per share came in at $1.31 for the first three months of the year, which was well below analyst expectations of $1.69. But what was even more troubling was its guidance.
CVS reduced its adjusted earnings guidance for the year from $8.3 per share to just $7. The big reason for the revised outlook is rising medical costs. As things are still returning to normal levels, surgeries that people put off or were unable to take due to COVID-19 have been resuming, and that has impacted costs. Last year, UnitedHealth Group and other insurers said they were seeing an uptick in surgeries. And with CVS' health insurance business, Aetna, being a key part of its operations, the stock hasn't been able to avoid the effects of that. CVS CEO Karen Lynch says the company is "experiencing broad-based utilization pressure in our Medicare Advantage business in a few areas."
Why investors shouldn't give up on CVS
For traders and short-term investors, news of a guidance cut can be worrisome. But if your plan is to hold CVS Health in your portfolio for the long term, then it really shouldn't change your investing thesis in the business. Utilization rates may be high this year, but over time, they will normalize and come down. Artificial intelligence, for example, will open up opportunities for the pharmacy retailer to automate processes, reduce costs, and utilize analytics to make better decisions.
The company is also still in the early innings of consolidating its recent acquisitions, including Signify Health and Oak Street Health. It's taking a break from mergers & acquisitions as it looks to work on consolidating these recently acquired businesses. As it does that, it will cut down on costs, reduce inefficiencies, and improve its bottom line.
There's a lot of noise in the short term, which is weighing on the business right now. However, for long-term investors, the big picture here is that this is a growing company that has diversified into home health and primary care, and it is going to be in a great position to benefit from the healthcare industry's long-term growth.
CVS Health is an underrated stock to buy right now
Shares of CVS have been rallying after they hit new 52-week lows in May. However, the stock remains cheap, trading at around the levels it was at back in 2020. Investors remain hesitant to buy the stock, but that could be a mistake.
Not only does CVS possess a lot of potential in the long run to be a good growth stock, given its diverse healthcare business, but it's also an excellent option for income investors with its high-yielding dividend. As long as you're willing to be patient with the stock, CVS can make for a good stock to add to your portfolio today.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
