Is CVS stock ready for a rebound?

Key Points

• CVS has been delivering better-than-expected earnings and a bullish outlook. 
• Their shares have been upgraded, and the technicals are strong.
• Management has also just raised the company’s dividend, and all signs indicate a rally. 

Shares of CVS Health Corporation NYSE: CVS have been enjoying a decent run this month, with a 10% gain in less than two weeks. It comes after multiple months of consolidation and sideways trading, as investors and the stock stabilized after its 40% plunge. 

What’s also helping is a run of decent earnings, with last month’s Q3 report topping analyst expectations on both headline numbers. When a stock is trying to recover from an eye-watering selloff, being able to deliver earnings numbers that top the consensus is one of the best things they can do. It tells investors that the worst-case scenario, which likely drove shares down, to begin with, is not coming to pass, and so indicates that the selling may have been overdone. 

The report also saw forward guidance being increased, which is another uber-bullish sign from management. This tells investors that management now expects the worst-case scenario to definitely not come to pass and effectively confirms the thesis that a stock has been mispriced. 

Bullish turnaround

Considering the sharp selloff, which had shares back trading at 2013 levels just a few weeks ago, it’s a surprisingly quick turnaround. We’re inclined to think investors may have been a bit harsh on CVS earlier this year, which can only be good for those of us on the sidelines. 

The stock is now popping hard off the $65 level, which is where the bears have run out of steam on multiple occasions this year and is on track to test its recent highs. This will be around the $77 mark, which is the current high water mark of earlier attempts to bounce back. This time, though, it is different. 

We have a strong report from November showing the shift in momentum with the fundamentals, suggesting that previous decisive cost-cutting steps from management are already paying off. August, for example, saw the news of a company-wide restructuring plan, which led to 5,000 jobs being cut. Since then, there has been a run of analyst upgrades, such as that from Wolfe Research, who moved CVS shares to a Buy rating, as did Evercore ISI. 

Decisive steps

Both teams cited improvements to the company’s operational issues as key drivers behind the upgrade, along with increasing confidence in management’s outlook. They’re both also expecting the company to get back its 4-star rating on its key Medicare Advantage plan, which itself should provide a considerable tailwind to future earnings. Both have a price target for CVS stock in the $80 range, with Evercore’s marginally higher at $83. Even with the recent run, that’s still pointing to a further upside of around 15% from where shares closed on Wednesday and, crucially, would put the stock well above its previous highs. 

From a technical perspective, this would confirm that a low has indeed been put in by CVS shares and that a new rally has begun. It may be a while before the stock is back trading at its post-pandemic highs, but it’s looking more and more likely that this is the formation of a fresh rally. Having endured a horrendous start to the year, CVS, with its 60-year history, has proven itself to be as resilient as ever.

Getting involved

And the bulls will take further confidence from management’s decision this week to raise the company’s dividend. When they boost their own forward guidance, this is a signal to the market that their outlook is rosier than expected and their confidence levels in being able to deliver returns are high. Such is the negative reaction to any cut to a company’s dividend that companies only really increase when they’re excessively confident of their ability to maintain the new amount indefinitely. This, in turn, can only be viewed as a clear indicator of their bullish outlook. 

So, with a revenue and earnings engine that’s performing better than expected, improved forward guidance, a bullish technical setup, and an increased dividend, there’s really not a lot to dislike about CVS right now. For those of us on the sidelines, this is about as clear a low as you can expect to see.