by We recently compiled a list of the 10 Most Undervalued Large-Cap Stocks to Invest In. In this article, we’ll take a look at where CVS Health Corp. (NYSE:CVS) ranks relative to other undervalued large-cap stocks.
Are cyclical stocks the new investment strategy?
With significant gains already being realized following the Fed’s aggressive rate decision in September, historical trends indicate that markets tend to remain flat or slightly up in the 30 to 60 days following the first rate cut. Positive factors contributing to the current rally include strong internal market dynamics, with much of the S&P 500 trading above their 200-day moving averages, and optimism around stimulus from China.
At such times, investors are warned not to assume certainty about market results. They are advised to consider protective strategies, such as exploring shorter-term bonds as a hedge against possible rapid rate cuts by the Fed. Overall, focusing on sectors with strong fundamentals yet adaptability can help investors navigate economic uncertainties. Liz Young Thomas, head of investment strategy at SoFi, has a similar sentiment. We discussed her opinion in our article about the 8 Most Active US Stocks to Buy Nowhere’s an excerpt from it:
“In discussing valuation concerns, Young agreed that while U.S. market multiples are relatively high, hovering around 21 to 22, this is not unprecedented compared to historical norms. She pointed out that current valuations are above both the 5- and 10-year averages, but not at the overbought level… Young expressed a wish that the market would shift to 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, especially in industrial stocks… In terms of identifying sectors with the potential for faster earnings growth, Young emphasizes the importance of thorough research and analysis rather than to rely solely on top-down market movements… she advised investors to remain vigilant and consider protective strategies. She suggested exploring opportunities within the Treasury curve, especially in shorter-dated bonds, as a hedge against possible faster-than-expected Fed rate cuts. ”
Citi’s U.S. equity strategist Scott Chronert joined CNBC’s “Squawk on the Street” on Oct. 2 to discuss his assessment of the top averages and stocks to end the year and how investors should focus on growth and cyclicals to manage potential market fluctuations.
Scott Chronert set a target for the S&P 500 at 5,600. As the market entered October, major global events occurred, 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, especially in light of the ongoing conflicts involving Russia, Ukraine and Israel.
Turning to the geopolitical landscape, he noted that the situation in the Middle East remains unpredictable and remains a wild card. This uncertainty has led to a tactical shift to an overweight position in energy stocks as they enter the fourth quarter, suggesting that rising tensions could be beneficial for this sector. However, he characterized this move as somewhat counterintuitive given the current market environment.
When discussing monetary policy, Chronert indicated that the Fed is still pursuing a less restrictive policy and has not yet reached a point where it can be considered fully accommodative. The focus is on balancing growth and taking a defensive stance at the end of the year. This approach includes an overweight position in the financial sector, while avoiding more defensive sectors that have historically been considered 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 focused on the Fed’s role in achieving a soft landing for the economy. Chronert believes that if the Fed continues to cut rates, as evidenced by market expectations of potential rate cuts of up to 200 basis points in total, this could create a favorable environment for equities. However, he acknowledged that markets have misjudged the Fed’s actions in the past.
The discussion raised concerns about the potential risks facing both monetary policy and economic performance. Chronert emphasized that the bigger risk lies in the Fed needing to stay ahead of the economic narrative rather than lagging behind. A deterioration in working conditions could lead to further interest rate cuts; However, he cautioned against viewing this solely as a negative for equities. Instead, he sees potential risks related to inflation arising from rising commodity prices due to geopolitical tensions.
Looking ahead to 2025, he expressed concern about how the ongoing debates over deficit financing could impact markets, particularly regarding bond market dynamics and potential pressure from bond watchdogs. He noted that while immediate risks appear manageable, longer-term implications could arise from political developments surrounding the US elections.
Moreover, he suggested that markets could see supportive conditions with expectations of rate cuts, possibly by 50 basis points in November, while he was comfortable with 25 or 50 basis points, as long as the overall trajectory remains constructive.
Analysts are increasingly bullish on large-cap stocks, viewing them as a strong investment choice amid the current market volatility. Scott Chronert’s assessment is consistent with this perspective, as he suggests that leaning on growth and cyclical factors could be beneficial for investors navigating the choppy year-end conditions. With their stability and potential for stable 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, which is our definition of large-cap stocks. We then selected stocks with a forward price-to-earnings ratio of less than 15 and created a list of ten stocks that were 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 with stakes in them, as of the second quarter of 2024.
Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research shows that we can outperform the market by imitating the best stock picks from the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points (Ssee more details here).
A row of shelves in a pharmacy, demonstrating the variety of medications 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, operating a network of retail pharmacies, offering pharmacy benefit management services and delivering healthcare services through its MinuteClinic walk-in clinics. It also owns and operates the health insurer Aetna, and is committed to providing accessible, affordable healthcare solutions to individuals and communities across the US.
The company is doing well as it becomes a more integrated healthcare provider. It is expanding its MinuteClinics and improving its telehealth services to more easily deliver care and attract new customers. It also bought Aetna, allowing it to offer more complete healthcare solutions. This is in line with the healthcare trend toward value-based care, which focuses on better patient outcomes and long-term growth.
The company serves nearly 187 million people. More people are taking advantage of Aetna’s medical plans through CVS pharmacies, and Caremark now covers 13.8 million Aetna members. It lowered its full-year profit forecast due to problems at its Aetna insurance division. This is the second time it lowered its 2024 forecast. However, the company’s revenue still grew 2.6% in the second quarter of 2024, partly due to the successful launch of CVS CostVantage.
Management expects to improve profit margin in the Medicare Advantage segment by approximately 110 basis points through 2025. This is within the target range of 100 to 200 basis points. The company also expects a 5% decline in the number of Medicare Advantage members and $500 million in cost savings.
CVS Health Corp. (NYSE:CVS) is doing well because of its new ideas and the way it combines different healthcare services. It is growing faster by using transparent payment models, increasing use of biosimilars and improving patient care through connected healthcare resources.
Coho Relative Value Equity Strategy stated the following regarding CVS Health Corporation (NYSE:CVS) in its Q2 2024 letter from an investor:
“While we believe that each of these companies is performing in line with or exceeding our expectations and that the share price declines are not justified, CVS Health Company (NYSE:CVS) and Nike reported disappointing performance in recent results. In the case of CVS, management provided an optimistic outlook for 2024 at Investor Day in December, which we believe was in line with our expectations. Unfortunately, management misjudged the medical claims ratio and projected profitability in its book for Medicare Advantaged lives. This led to a breach of the position paper as the company’s financial flexibility now appears limited in both 2024 and 2025.”
In short, CVS is in 10th place on our list of the most undervalued large-cap stocks to invest in. While we recognize the potential of CVS as an investment, our belief lies in the belief that AI stocks are promising because they deliver high returns in a shorter time frame. If you’re looking for an AI stock that’s more promising than CVS but trades at less than five times earnings, check out our report on the cheapest AI stocks.
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Disclosure: None. This article was originally published on Insider Monkey.
