CVS Health Corporation (CVS), which merged with Aetna in 2018, is trading higher by nearly 2% in Tuesday's pre-market session after beating fourth quarter 2020 estimates, posting a profit of $1.30 per share while revenue rose an expected 4.0% year over year to $69.55 billion. The health care giant issued in-line guidance for fiscal year 2021, now looking for earnings between $7.39 and $7.55 per share, compared to prior estimates of $7.54.

Key Takeaways

  • CVS beat fourth quarter earnings estimates, triggering a modest "buy-the-news" reaction.
  • The stock topped out more than five years ago.
  • A third pandemic wave or adverse Supreme Court decision on Obamacare could trigger broad-based distribution.

The chain is benefiting from COVID-19 testing and vaccines that have increased foot traffic in this highly competitive venue. Same-store sales rose 5.3% in the prior quarter, with a 7.5% surge in the pharmacy division. CVS has conducted 15 million tests in the past year, contributing to pharmacy income. A contract to inoculate residents of nursing homes and assisted living facilities is now wrapping up, freeing precious vials for lower-priority groups.

The performance of the Aetna division may depend on a Supreme Court decision about the legality of Obamacare, with repeal likely to generate chaos across the health insurance industry. Analysts believe that the court took a skeptical view toward repeal arguments in late 2020, but the conservative court could find a reason to overturn the law, increasing risk for long-term positions. The decision isn't expected under later this year.

Wall Street has maintained a mixed view of the long-term outlook for CVS, with a consensus "Overweight" rating based upon 15 "Buy," 3 "Overweight," and 5 "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $75 to a Street-high $102, while the stock is set to open Tuesday's session on top of the low target.

Tip

The Affordable Care Act (ACA) is the comprehensive health care reform signed into law by President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act, and often just called Obamacare, the law includes a list of health care policies intended to extend health insurance coverage to millions of uninsured Americans

CVS Health Monthly Chart (2011 – 2021)

Chart showing the share price performance of CVS Health Corporation (CVS)

TradingView.com

The stock completed a round trip into the 2008 high at $44.29 in the first quarter of 2012 and broke out, entering a powerful trend advance that posted an all-time high at $113.65 in July 2015. The mini-flash crash a few weeks later signaled the start of a major downtrend that carved a long series of lower highs and lower lows into March 2019, when committed buyers emerged in the lower $50s.

Mixed action tested support in March and November 2020, grinding out a potential triple bottom reversal that still hasn't issued meaningful buying signals. That will change when the uptick that started in the fourth quarter of 2020 mounts the November 2019 peak at $77.03 and lifts into 2018 resistance in the mid-$80s. Accumulation and market direction look indecisive at this juncture, with the pandemic weighing on Aetna results while the Supreme Court generates uncertainty.

Resistance from 2018 also marks the 2015 mini-flash crash low, highlighting a major infection point that could generate a low-risk buying opportunity at some point in the future. Prospective buyers should remain narrowly focused on price levels in coming months to avoid getting trapped by a third pandemic wave, driven by a virulent variant, or a left-leaning Congress that takes another shot at Medicare-for-All.

Tip

A triple bottom is a bullish chart pattern used in technical analysis that is characterized by three equal lows followed by a breakout above the resistance level.

The Bottom Line

CVS Health is trading higher after solid fourth quarter metrics, but macro issues could keep prospective investors on the sidelines.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.