December 23, 2013 - CVS Can Provide Plenty of Benefits to Your Portfolio
This year has been a banner year for stocks. The S&P 500's nearly 27% return puts 2013 in the top 15 best years the index has ever had. And while some sectors look a little overvalued, by and large, the market seems to be positioned to keep moving higher.
That is especially true if, as a variety of economists including the ones pulling the strings at the Federal Reserve believe, the economy is moving in the right direction. The central bank's recent decision to start easing back on its bond-buying program means it believes the economy is healthy enough to keep growing on its own, although the Fed was clear to point out that it has no timetable for ending the program altogether and will also be very cautious when it eventually starts to raise interest rates.
All that is a long way of saying that while 2014 probably won't be as good for stocks as 2013, it won't necessarily be a bad year. The key, as always, is put your money in the right place.
One stock that seems like it could easily post another banner year is drugstore and pharmacy benefits chain CVS (CVS). The stock is up 42.32% in 2013, and while it seems unlikely that it will do that again in 2014, it has a price-to-earnings ratio of about 19, which doesn't seem too bad. Nearest competitor Walgreen (WAG) has a PE of 21.
CVS also has one of the nation's largest pharmacy benefit businesses, and area that could easily grow faster that the company's traditional retail business in 2014. The reason for that is the Affordable Care Act. Regardless of how you feel about how the law works, the fact remains that it is going to put a lot of new people into the healthcare system, which is going to mean a lot more people visiting doctors and hospitals, and getting prescriptions filled. As one of the largest pharmacies in the country, a decent-sized portion of that business is going to go to CVS, especially since some insurers insist that covered prescriptions be filled through CVS Caremark, the company's pharmacy benefit manager business.
Analysts expect the company's earnings to grow by 12.9% in 2014, down from 15.5% this year, but still not too shabby.
Chart courtesy of stockcharts.com
This week's trade is a little different, rather than just a couple of months, I'm looking at a trade that expires in January of 2015. That's a long time to have your money tied up, but a January 2015 70/75 bull-put spread on CVS nets a credit of $2.75, which is a 122.22% return. The breakeven point for this trade is $72.25, which means we need the stock to go up a little bit, but we get a full profit if the stock ads anything more than 6.9% in 2014, which doesn't seem to be asking too much given its recent strength and solid outlook.
Last year's long-term trade on Crown Castle International (CCI) has paid off beautifully. Crown Castle needed to close above 70 at July expiration for us to realize a full profit and the stock spent the entire month above that level, easily returning us our full 40.85% profit.