Why Michael Burry Is a Fan of CVS
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According to recent 13-F filings, the famous "big short" investor Michael Burry has bought call options on CVS Health Corp. (NYSE:CVS) in successive quarters. There's been a lot of speculation as to why he's bound to the stock, but it seems as though he sees value due to the stock not living up to its full potential of late.
CVS has underperformed the S&P since the 2020 Covid rebound, while markets have acted irrationally, essentially ignoring high-quality companies. However, the tide is about to turn as the sentiment on Wall Street is that value stocks will start outperforming toward the back end of 2021.
Earnings
The drug store chain beat its latest earnings estimates with revenue of $69.1 billion and earnings of $2.04 per share. In addition, the company has a strong revenue compounded annual growth rate of 11.8% and a free cash flow yield of 2.35%.
The stock holds excellent value with a price-earnings multiple of 11.2 while simultaneously paying sustainable dividends with a yield of 2.35%.
Valuation
Analysts expect the stock to gain up to 17% over the next 12 months, with Merill Lynch being the latest big bank to set a price target ($103).
The company's free cash flow is integral to its stock performance and a useful metric to use for a price target. I thus opted to use the free cash flow and multiplied it by the enterprise value/Ebitda (this is a metric often used in mergers and acquisitions valuation) to arrive at a price target of $110.26, which could provide investors with an upside of around 23% over the next 12 months.
Final Word
CVS is a popular stock at the moment, and earnings beats and a good dividend yield make it attractive. The stock has underperformed the market during a Covid recovery period due to inefficient markets. The stock will rebound and could hit the $103 mark in the next 12 months.
This article first appeared on GuruFocus.
