New CVS Uptrend Unlikely Despite Strong Quarter

CVS Health Corporation (CVS) shares rose more than 4% to a three-week high in Wednesday's pre-market after the company beat second quarter estimates with profits of $1.89 per share on $63.43 billion in revenues. Those revenues expanded a healthy 35.2% year over year, benefiting from the November 2018 acquisition of health care giant Aetna. The company also raised fiscal year 2019 earnings per share (EPS) estimates by a few cents, now expecting $6.89 to $7.00.

The company's pharmacy operations have been under pressure in recent years, buffeted by political headwinds arising from the industry's drug pricing practices. It is inevitable that the issue will gain additional traction during the 2020 presidential campaign, keeping a long-term lid on profits. In addition, CVS faces major exposure if the current legal challenge to the Affordable Care Act (ACA), also known as Obamacare, elicits an unconstitutional finding that sends health carriers into a tailspin.

CVS stock has been a bad performer in recent years, hitting an all-time high in 2015 and selling off after pricing scandals involving Valeant Pharmaceuticals and Turing Pharmaceuticals. CVS shares have posted a long series of lower highs and lower lows since that time and are now trading dangerously close to a six-year low. Ominously, timing of the Aetna acquisition couldn't be worse, with the ACA under attack and politicians looking for ways to rein in health care costs.

CVS Long-Term Chart (1995 – 2019)

Long-term chart showing the share price performance of CVS Health Corporation (CVS)

A six-year downtrend ended at a split-adjusted $5.88 in 1996, giving way to a strong recovery wave that posted new highs into the February 1999 peak at $29.19. It got cut in half into the first quarter of 2000 and turned higher, completing a round trip into the prior high in November. A breakout failed in June 2001, dumping the stock into a tailspin that finally bottomed out at a six-year low near $10 in 2003.

A mid-decade uptrend posted impressive gains, clearing 2001 resistance in 2005, ahead of continued upside into the 2008 high at $44.29. It held up relatively well during the economic collapse, dropping to a four-year low in the mid-$20s, but the subsequent bounce failed to gain traction, stalling at the .618 Fibonacci sell-off retracement level in 2009. It cleared resistance three years later, entering a historic advance that nearly tripled the stock price into 2015's all-time high at $113.65.

The August 2015 mini flash crash defined support at $81 that broke following the presidential election, highlighting the negative political influence on the company's pharmaceutical operations. The decline settled in the mid-$70s and crisscrossed that level repeatedly into a February 2019 breakdown that reached a six-year low at $51.77 in April. The stock has spent the past four months grinding sideways at that support level. 

The downtrend finally hit 200-month exponential moving average (EMA) support in March 2019, while the monthly stochastics oscillator turned higher in June after an extremely deep sell cycle. This potent combination bodes well for higher prices in coming months, but the stock faces enormous overhead supply that will take major buying power to overcome. That seems unlikely heading into the 2020 presidential election, given the selling pressure that followed the 2016 campaign.

CVS Short-Term Chart (2016 – 2019)

Short-term chart showing the share price performance of CVS Health Corporation (CVS)

The on-balance volume (OBV) accumulation-distribution indicator confirms a steady exodus of institutional and retail shareholders in the past few years. OBV hit a seven-year low in the first quarter of 2019 and tested that level ahead of this morning's upbeat confessional. While buyers could finally take control in the coming weeks, major resistance is situated just a few points higher, at the alignment between the 2019 breakdown and 200-day EMA near $60.

A more realistic upside target lies at the unfilled February gap between $65 and $70, given multiple whipsaws around the long-term moving average in recent years. It could be years before the price zone is mounted successfully, with macro headwinds on the agenda for at least the next 18 months. In the meantime, beaten-down shareholders will have to settle for the healthy 3.61% forward dividend yield.

The Bottom Line

CVS Health stock is trading higher after a strong quarter but faces massive overhead supply following a brutal four-year downtrend.

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

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