Should You Consider CVS?

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With shares of CVS Caremark (NYSE:CVS) trading around $73, is CVS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

CVS Caremark is a pharmacy and healthcare provider in the United States. The company operates in three business segments: Pharmacy Services, Retail Pharmacy, and Corporate. The products and services offered at CVS Caremark stores may be deemed as essential by many consumers in the United States. As CVS Caremark provides an efficient and affordable healthcare and pharmacy experience, look for it to see rising profits.

Pharmacy chain operator CVS Caremark has settled with the U.S. Securities and Exchange Commission and accepted a $20 million civil penalty in matters pertaining to disclosures and securities transactions that took place in 2009, as well as the company’s accounting for its 2008 purchase of Longs Drug Stores. The government agency charged CVS with “misleading investors about significant financial setbacks and using improper accounting that artificially boosted its financial performance,” the SEC said in a release on Tuesday. CVS agreed to settle the claims by means of the aforementioned $20 million penalty. “In offering documents for a $1.5 billion bond offering in 2009, CVS fraudulently omitted that it had recently lost significant Medicare Part D and contract revenues in the pharmacy benefits segment,” the SEC said in its report. “Investors were therefore misled about the expected future financial results for that line of business. When CVS eventually revealed the full extent of the setbacks on November 5, 2009, its stock price fell 20 percent in one day.”

The SEC also charged CVS with making “improper accounting adjustments” that overstated the company’s financial results for its retail pharmacy division. Further, CVS reportedly didn’t disclose the adjustments that it made relating to its acquisition of the Longs Drugs chain in its quarterly report filed on November 5 of the same year. CVS apparently brought the $189 million value of personal property in the Longs stores down to $0 “and then reversed $49 million of depreciation that had been taken on those assets since the acquisition,” the SEC said.

T = Technicals on the Stock Chart are Strong

CVS Caremark stock has been displaying a strong trend in recent times. The stock is currently trading near all time highs and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, CVS Caremark is trading above its rising key averages which signal neutral to bullish price action in the near-term.

CVS

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of CVS Caremark options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

CVS Caremark options

20.70%

90%

88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

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