CVS Health (NYSE: CVS) is a big name in healthcare, and it has generally been seen as a good way to invest in the industry. In addition to its pharmacy retail operations, the company has a pharmacy benefits management business. With its acquisition of Aetna in 2018, it has also become a key provider of health insurance.
Despite that apparent stability, the stock hasn't been a great buy. Over the past three years, it has lost close to half of its value. And with recent management changes and many question marks surrounding the business, there's still plenty of uncertainty ahead.
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However, its low valuation could have investors wondering if now is the right time to take a chance on the business, especially before it releases its year-end earnings numbers on Feb. 12. Let's take a look at whether CVS could potentially be an underrated buy right now.
Why betting on earnings could come with big risks for investors
Shares of a company can be volatile after it releases its earnings numbers, depending on how well (or poorly) it does against analyst expectations. A solid beat could be great news for a stock such as CVS, which is what investors may be hoping for, especially given how beaten down its valuation is right now.
In recent quarters, however, CVS has underperformed. Not only have its numbers come in worse than expectations, it has also lowered its guidance multiple times. The company is navigating a tumultuous time in healthcare when there is pressure to reduce costs. And with a new presidential administration taking over and affecting U.S. government policies, there's arguably even more uncertainty, not less, for CVS in the near term.
Regardless of how it has performed during its most recent quarter, the focus should always be on the long-term and the bigger picture. One way for investors to gauge what direction the business is going in is to wait for theearnings call to get an idea of the CEO's vision and long-term strategy.
Getting a better glimpse of the CEO's strategy could be key in determining if CVS stock is a good buy
CVS' new CEO David Joyner took over in October, which means these upcoming quarterly results will mark the first full quarter where he was in charge of the business. That's another reason why waiting until after earnings to make an investment decision could be a smart thing for investors to do. Waiting and getting a better glimpse of the new CEO's strategy for the future could help determine what kind of path the stock may be on.
I'll be looking at how eager and willing he is to consider all options, including slashing the dividend, reducing store count, and potentially selling assets in order to arrive at a much leaner operating model. That's because while CVS' business is massive, with sales totaling nearly $370 billion over the past four quarters, its profits total just over $5 billion during that stretch.
If Joyner isn't looking at making drastic changes, which I think are needed to improve and strengthen the business, that would have me worried that CVS' stock may not be able to turn things around anytime soon.
CVS is a stock investors should tread carefully with
I wouldn't buy shares of CVS before earnings, as that can be a risky strategy to take on. Not only could the business underperform yet again, but there are still too many questions about where the healthcare company is heading for this to be a safe investment right now.
It's the CEO's words investors should be paying close attention to after it releases earnings, not whether it beats expectations for the past quarter. Joyner's vision for the future, and whether you think it's a good strategy, should weigh much more on your decision of whether to invest in CVS than whether the company performed well over a period of three months. That's why, for long-term investors, the ideal option at this stage is to take a wait-and-see approach with CVS. Given the uncertainty around the business right now, it's not worth rushing to buy shares of the company.
Should you invest $1,000 in CVS Health right now?
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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.
