CVS: In Search Of A Major Low (NYSE:CVS)

By Levi Produced with Avi Gilburt

CVS appears to be in a position where its fundamentals are aligning with the technicals to provide us with a higher probability pick. Let’s look at that fundamental snapshot as well as what we would need to see to further confirm that a major low has indeed been struck.

The Fundamentals

Lyn Alden regularly provides our members with deep dives into the fundamentals of dozens of companies. See below an excerpt from her recent report on CVS:

“CVS is a health insurer, pharmacy benefit manager, and retail pharmacy/convenience/healthcare center combined. Over time, CVS is transitioning more of its square footage in its stores to on-site basic medical care.

However, the stock is now back near its 2019 low valuation levels, with signs of a momentum shift. It’s definitely one to watch.

It’s a funny analysis if you compare this CVS FASTGraph to the Apple (AAPL) FASTGraph near the beginning of this report. Both stocks have had stagnant fundamentals for two years (orange/blue lines going sideways), and during that time, Apple’s stock price surged higher while CVS’s dropped hard. Apple is trading at nearly 4x as high of a price/earnings ratio as CVS at the moment. Now, I do think Apple should have a higher earnings multiple, maybe even twice as high, but four seems excessive and the power of sentiment on these stocks has been impressive.

Ever since its Aetna acquisition, CVS had been in a period of financial consolidation and simplification, focused on debt reduction, share buybacks, and resumed dividend growth. This changed a bit over the past year when they acquired Signify Health and Oak Street Health for a combined price of over $18 billion. This has been in contrast to the prior period of debt reduction and share buybacks to make a leaner structure, and the acquisitions were not cheaply priced.

In my view, the market has been underwhelmed by these recent acquisitions, and so I think the correction in price was partly warranted. CVS already has a lot of complexity in their business, and so directing cash flow toward organic growth, dividends, share repurchases, and debt reduction would be the simpler path going forward than adding yet more external businesses under their already enormous umbrella. In addition, the pharmacy benefits business has been facing some regulatory scrutiny as of late.

However, I expect the company to once again move back to a strategy of consolidation, integration, and organic growth, now that these additional moving parts have been added, and thus I like the risk/reward ratio of CVS within the context of a diversified portfolio.”

This is a compelling base on which to build our premise. So, what do we need to see from the price on the chart to further cement this?

The Technical Viewpoint

The highest probability setup for a longer term position in CVS will be once the [1]-[2] completes as illustrated on the chart. It’s likely that the wave [2] pullback will come back to this current area of price.

Some investors/traders choose to take a long position while wave [1] is yet underway. Others will opt for their long entry once it appears that wave [2] is completing. That’s up to each person’s risk vs reward point of view and their own style.

Regardless of style, we can discuss what appears to be the probable path forward and what we would prefer to see to further confirm that a major low is indeed in place.

To begin, we must understand where we find ourselves in the bigger picture. Why is this so important? Because it’s the context of this bigger point of view that tells us what the structure of the following wave should be. In this case, since we have just completed a [C] wave of a larger Primary B wave, the next leg up should be Primary C of an even bigger Cycle ‘V’ and be in 5 waves.

That’s the upper altitude view. Nearer to the ground, we’re anticipating wave [1] to complete in the $86-$90 level with the wave [2] to follow. Typically, a 2nd wave will retrace anywhere from 38% to 62% of wave 1. Why do we say this? Thousands upon thousands of charts over many years have provided us with a plethora of examples.

Risk: Should price instead move below $62, we would reassess the near term bullish expectations.

Why Must We Eat All Of This Alphabet Soup?

Well, you don’t actually have to eat it. But, it’s rather basic once you figure out the letters and nomenclature. It’s this styling of naming the waves that tells us where we find ourselves at any given moment in time.

As well, the markets display self-similarity at all degrees. This means that their structures are fractal in nature and will repeat from the smaller scale to the larger scale. It’s this very feature that gives Elliott Wave theory, when correctly applied, its power. We are observing human crowd behavior unfold before our very eyes.

We have an extensive Education library available at Elliott Wave Trader. As well, we want to teach others this methodology. Three times a week we have beginner and intermediate level videos where we show the exact way we count the waves and give in-depth analysis techniques. This methodology, if you give it the chance, will change the way you invest forever. More on that can be found here.

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

(Housekeeping Matters)

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