2 Great Value Stocks to Buy Right Now
Value stocks often deserve the depressed stock valuations they receive. Long-term contraction in demand, increased competition, operational errors and more can make stocks cheap for very good reasons.
Yet there are rare instances where these value stocks actually have the ability to generate meaningful returns for shareholders over time. Let’s dig into two of these names specifically.
1. CVS Health is solid
SVC Health (CVS 0.84%) trades at a forward price-to-earnings ratio of 10.1. Its physical pharmacy business has long been under competitive pressure from Amazonbut Bezos has been trying to compete in this space since 2002 with Amazon’s failed purchase of Drugstore.com – and yet CVS is doing well financially.
During CVS’s most recent quarter (July-September 2020), revenue grew 3.5% year-over-year to approximately $47.7 billion. CVS operating cash flow jumped 20.3% year over year to about $12.3 billion. The strong result prompted the company to raise its operating cash flow forecast by $1.75 billion for the full year, its second straight quarter.
Importantly, CVS’ outperformance in terms of cash generation allowed it to comfortably cover its dividend, repay $4.75 billion in net debt, add more than $3.5 billion in cash on its balance sheet and finally to commit to continuing to deleverage its operations to 3x by 2022.
To bolster the company’s somewhat precarious brick-and-mortar pharmacy moat, she’s actively transformed her store’s footprint into what she calls Health Hubs. These health centers will have all the goods that consumers can count on in a pharmacy, but will offer much more than that.
The centers will serve as hubs for routine medical services for treatment of common illnesses, chronic care, and a plethora of other exams that a company like Amazon can’t just ship to your door like it can with a prescription. The company has enjoyed a significant increase in store performance for locations that have already converted and will continue to convert more in the future.
To further strengthen the company’s advantage, it purchased Aetna – one of America’s largest pharmaceutical benefits managers – in 2018. The integration enables CVS to profitably generate more savings and convenience for its customers through a more vertically integrated approach – a winning solution. win for all participants. Current CVS CEO Larry Merlo will step down this year and former Aetna President Karen Lynch will take over.
With the company’s financial performance so strong, now is the perfect time for a change in leadership and Lynch is a strong candidate to continue driving CVS Health’s success.
2. FedEx finally delivers
As with CVS, fedex (FDX 4.63%) has struggled for years with fears that Amazon’s entry into its messaging industry will spell doom. But again, not so fast. While Amazon was a large chunk of FedEx’s order book at the height of the relationship, it was FedEx’s lowest-margin business — the company made very little money on Amazon.
Although the breakup with Amazon was not transparent, it allowed FedEx to focus on building a higher quality order book to make more profits. More recently, the company announced partnerships with large caps such as walmart, Targetand General dollar — three direct competitors of Amazon who are happy to outsource their logistics business to a non-competitor like FedEx.
The financial data supports this encouraging story quite well.
In FedEx’s most recent quarter (September-November 2020), revenue jumped 19% and reported operating margin grew rapidly from 3.9% to 7.4%, year-over-year . As a result, FedEx’s net income jumped 97% to $1.3 billion. The company has long struggled to squeeze margins and profits – no longer with leaders like Rajesh Subramaniam helping to guide the company to triumph. Regardless of the strong performance, the company is trading for just 14.3 times forward earnings.
We must consider that FedEx has been somewhat boosted by the pandemic. E-commerce demand has exploded with COVID-19, and FedEx is benefiting from it on the business-to-consumer (b2c) side.
Still, it has a large business-to-business (b2b) segment that has been badly hit by the pandemic and is expected to recover as it shrinks. These b2b executions typically represent a higher margin for FedEx than e-commerce, meaning it should actually benefit from global standardization over time.
Two value stocks with real value
Both CVS and FedEx offer shareholders a better future than the performance or valuation of either would suggest. For this reason, both are part of my portfolio and I think you should also consider both stocks.