CVS Health Corporation (CVS) stock has been "too cheap to ignore" since 2019 began, and weakness has held at or just above its semiannual value level at $51.86 since March 8. The 2019 high was set at $70.32 on Feb. 29, and the stock plunged despite beating earnings per share (EPS) estimates for 12 consecutive quarters.
CVS stock closed Monday, April 29, at $53.99, down 17.6% year to date and in bear market territory at 34.3% below its 52-week intraday high of $82.14 set on Nov. 14. The stock set its 52-week intraday low of $51.77 on April 2 when it tested and held its semiannual value level at $51.86. The near-term upside potential is to its quarterly risky level at $57.71.
The stock is currently "too cheap to ignore" by two measures. Its P/E ratio is just 7.60, and its dividend yield is 3.74%, according to Macrotrends. In addition, the 12 x 3 x 3 weekly slow stochastic reading has plunged to 9.37, below the threshold of 10.00 that I consider "too cheap to ignore."
Analysts expect CVS to report EPS between $1.50 and $1.54 when it discloses earnings results before the opening bell on Wednesday, May 1. At issue are the uncertainties related to the future of health care in the United States, as some Democrats want to enact a Medicare-for-All plan. CVS has been attempting to pave the way to help health care reform, which would likely be hurt by a government-controlled health care system.
CVS Health bought health insurer Aetna on Nov. 6 and is revamping stores with the objective of becoming "the nation's premier health innovation company." The company wants to become a "health care hub," reducing space for general retailing. The focus is shifting to prescription benefit services, personal care products and additional Minute Clinics.
The daily chart for CVS
The daily chart for CVS shows that the stock had a downside "key reversal" day on Nov. 14 and then an upside "key reversal" on Dec. 26. The downturn from $82.14 to $62.06 equated to a bear market decline of 24%.
The stock closed 2018 at $65.52, which was input into my proprietary analytics. This established the semiannual value level at $51.86 and an annual risky level above the chart at $106.84. The close of $53.93 on March 29 resulted in the quarterly risky level at $57.71.
The weekly chart for CVS
The weekly chart for CVS is negative but extremely oversold, with the stock below its five-week modified moving average of $55.20 and well below its 200-week simple moving average, or "reversion to the mean," at $81.18. The stock has been below the 200-week simple moving average since the week of Nov. 4, 2016. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 9.37, with the reading below 10.00 making the stock technically "too cheap to ignore."
Trading strategy: Buy CVS shares on weakness to the semiannual value level at $51.86 and reduce holdings on strength to the 200-day simple moving average at $67.80. My quarterly pivot at $57.71 could be considered a tighter sell level.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The monthly level for May will be based upon the close of April 30. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.