3 Reasons to Sell CVS and 1 Stock to Buy Instead

Over the past six months, CVS Health has been a great trade, beating the S&P 500 by 13.8%. Its stock price has climbed to $65.46, representing a healthy 19% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in CVS Health, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is CVS Health Not Exciting?

We’re happy investors have made money, but we don't have much confidence in CVS Health. Here are three reasons why you should be careful with CVS and a stock we'd rather own.

1. Lackluster Revenue Growth

We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. CVS Health’s recent performance shows its demand has slowed as its annualized revenue growth of 6.8% over the last two years was below its five-year trend.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for CVS Health, its EPS declined by 4.8% annually over the last five years while its revenue grew by 7.9%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, CVS Health’s margin dropped by 2.9 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of an investment cycle. CVS Health’s free cash flow margin for the trailing 12 months was 1.2%.

Final Judgment

CVS Health isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 10.2× forward P/E (or $65.46 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Like More Than CVS Health

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