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Is CVS Health stock a buy?

CVS Health (CV 1.20%) is a leading pharmacy retailer in the United States and has expanded its operations over the years to enter deeper into the healthcare space. The stock also offers investors a dividend of 4.3%, which is more than double the S&P500 An average of 1.3%. Combine that with the relatively low price-to-earnings ratio of 11, and it looks like an investment that’s too good to be true.

But despite all this, investors aren’t rushing to buy stocks. CVS stock is down 22% year-to-date. What’s behind all this pessimism? Is the stock in trouble, or is this simply a great buying opportunity?

CVS shares punished for strong forecast adjustment

On May 1, CVS released its latest earnings results, and that’s when the stock started to falter. It’s one thing to miss expectations, but to drastically cut guidance is even more worrying for investors. When that happens, a sell-off often follows. CVS’s adjusted earnings per share for the first three months of the year were $1.31, well below analysts’ expectations of $1.69. But even more worrying was the guidance.

CVS reduced its adjusted earnings forecast for the year from $8.3 per share to just $7. The main reason for the revised forecast is rising medical costs. As things are still getting back to normal, surgeries that people have postponed or have not been able to have due to COVID-19 are starting to resume, and that is impacting costs. Last year UnitedHealth Group and other insurers reported seeing an increase in operations. And since CVS’ health insurance business, Aetna, is a key part of the business, the stock has not escaped the impact. CVS CEO Karen Lynch says the company is “experiencing broad-based utilization pressure in some areas in our Medicare Advantage business.”

Why investors shouldn’t give up on CVS

For traders and short-term investors, news of a guidance cut can be unsettling. However, if you plan to keep CVS Health in your portfolio for the long term, it shouldn’t change your investment thesis in this company. Utilization rates may be high this year, but over time they will normalize and decline. Artificial intelligence, for example, will open up opportunities for the pharmacy retailer to automate processes, reduce costs, and use analytics to make better decisions.

The company is also in the early stages of consolidating its recent acquisitions, including Signify Health and Oak Street Health. It is taking a break from mergers and acquisitions to work on consolidating these recently acquired businesses, which will reduce costs, eliminate inefficiencies and improve its bottom line.

There is a lot of short-term excitement weighing on the business right now, but for long-term investors, the bigger picture is that this is a growing company specializing in home health and primary care and will be in a great position to benefit from the long-term growth of the healthcare industry.

CVS Health is an undervalued stock to buy now

CVS shares have rebounded after hitting new 52-week lows in May, but the stock remains cheap, trading around 2020 levels. Investors remain hesitant to buy the stock, but that could be a mistake.

Not only does CVS have a lot of potential to be a good growth stock over the long term due to its diverse healthcare business, but its high dividend yield also makes it a great option for income investors. As long as you’re willing to be patient with the stock, CVS can be a good stock to add to your portfolio today.

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