Is CVS Caremark the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if CVS Caremark (NYSE: CVS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at CVS Caremark.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

20.8%

Pass

 

1-Year Revenue Growth > 12%

3.0%

Fail

Margins

Gross Margin > 35%

20.1%

Fail

 

Net Margin > 15%

3.3%

Fail

Balance Sheet

Debt to Equity < 50%

29.0%

Pass

 

Current Ratio > 1.3

1.62

Pass

Opportunities

Return on Equity > 15%

9.1%

Fail

Valuation

Normalized P/E < 20

13.14

Pass

Dividends

Current Yield > 2%

1.5%

Fail

 

5-Year Dividend Growth > 10%

23.2%

Pass

       
 

Total Score

 

5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With only five points, CVS Caremark needs a prescription for perfection. Most people think of the company simply as a drugstore chain, but it actually has several other moving pieces.

CVS is the company behind its namesake drugstores. Going up against Walgreen (NYSE: WAG  ) and Rite Aid (NYSE: RAD  ) , CVS holds its own, having posted reasonably strong growth in recent years. Certainly, the company has avoided many of the problems that Rite Aid has faced by keeping its debt well under control.

But on the other side of its business, CVS hasn't been content to stand still. It recently won the lucrative CalPERS public employee pharmacy benefits management business away from Medco Health (NYSE: MHS  ) , which fell out of favor after a state investigation of possible improprieties. The company also bought the Medicare Part D business of benefit provider Universal American (NYSE: UAM  ) to bolster its health-care benefit division.

The big question for CVS going forward is how the planned merger between Medco and Express Scripts (Nasdaq: ESRX  ) will affect the pharmacy benefit industry. The merger could hurt CVS's market share as the combined Medco/Express Scripts wins contracts that it might otherwise have lost to CVS.

CVS faces some tough questions. Despite a fairly inexpensive valuation for CVS shares, you may want to take two aspirin and wait to see if the stock feels better in the morning before you jump in headfirst right now.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add CVS Caremark to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of MedcoHealth Solutions. Motley Fool newsletter services have recommended buying shares of MedcoHealth Solutions. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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