CVS Health Is Soaring 75% This Year. And the Stock Still Looks Cheap.

One of the hottest healthcare stocks to own this year has undoubtedly been CVS Health (NYSE: CVS). It's up 75% while the Health Care Select Sector SPDR Fund has climbed by just 6%. The performance, does, however, warrant an asterisk as CVS is coming off a brutal year in 2024 when it crashed more than 43%. The stock was beaten down and may have appealed to value-oriented investors.

Nonetheless, the company must be doing something right for investors to be significantly more bullish on the stock this year; a low valuation on its own usually isn't enough to give the stock this type of a boost. And even though the stock has rallied so much this year, CVS still doesn't look all that expensive given its level of profitability.

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CVS has been doing better under its new CEO

A year ago, the situation for CVS didn't look all that great. The company's results were underwhelming as it continually missed expectations due to high costs in its insurance business. Ultimately, it withdrew its guidance for the year and made a change in CEO, with David Joyner coming on and replacing Karen Lynch.

The company's growth rate, which was falling last year, has been steadily improving in recent quarters. However, that's also going to be easier to do when going up against weaker comparables from the previous year, so investors should consider the context.

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But at the very least, the business isn't continually disappointing investors and Wall Street as a whole. Its latest numbers, for the third quarter (which ended on Sept. 30), came in better than anticipated. CVS's adjusted earnings per share of $1.60 were easily above analyst expectations of $1.37. Meanwhile, revenue of $102.9 billion was up 8% and also better than the $98.9 billion that Wall Street was looking for.

With more stability in its business these days and improvements showing in its bottom line, investors have become more bullish on the healthcare stock recently, and rightfully so.

CVS stock still isn't all that expensive despite this rally

When a stock experiences a significant surge in value, oftentimes it means its valuation has become bloated, and it may not be worth investing in the business anymore. But that's not the case with CVS. Although the stock is up big this year, when you consider its level of earnings, it's still not an expensive investment to hold in your portfolio.

Currently, the stock trades at a price-to-earnings (P/E) multiple of 22. But that falls to less than 11 on a forward earnings basis. CVS's trailing P/E multiple looks a bit high, but that's because in its recent earnings report, it incurred a goodwill impairment charge of $5.7 billion. The forward P/E multiple factors in the level of earnings analysts expect from the business in the coming year, which also doesn't reflect one-time charges. Thus, it can be a more reliable way to assess just how expensive or cheap it is. And it does look cheap -- the average stock on the Health Care Select Sector SPDR trades at more than 18 times its future profits.

CVS is a solid stock to buy, and it also offers a great dividend

When you first look at CVS's rally this year, it looks incredibly impressive. But the stock is simply back up to where it was at the start of 2024. This recent surge has simply gotten it back to where it was before last year's massive sell-off. When you put things into context, you begin to see that it's not expensive at all, and it can still make for an attractive option for value-oriented investors.

Not only is the valuation attractive, but so too is CVS's dividend, which yields 3.4% -- more than three times the S&P 500 average of just 1.1%. If you want a solid healthcare stock and a great dividend, CVS is a stock you'll want to consider buying right now.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.