Someone must have forgotten to tell CVS Health (CVS -0.22%) that the stock market is soaring. Shares of the healthcare giant plunged as much as 28% year to date in June and are still down close to 20%.
However, there are at least some investors who find CVS Health attractive. Here's why billionaires are loading up on this dirt cheap stock.
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Hedge fund managers John Overdeck and David Siegel are each worth around $5.8 billion right now, according to Bloomberg. The two men co-founded Two Sigma Investments in 2001 along with Mark Pickard.
Two Sigma has become a big fan of CVS Health. In the first quarter of 2023, the hedge fund increased its stake in CVS by nearly 8x. Its position in the healthcare company is worth more than $400 million.
Forbes pegs the net worth of Paul Tudor Jones, II at $7.5 billion. Jones is the founder of Tudor Investment Corporation. In Q1, his hedge fund upped its position in CVS Health by more than 2.6x. Tudor's holding in CVS is valued at close to $37.6 million today.
Cliff Asness is currently worth around $1.6 billion, according to Forbes. He runs AQR Capital Management. AQR added 10.7% to its stake in CVS Health in the first quarter of 2023. This position is now valued at more than $350 million.
Behind the buying
Why are these billionaires investing in CVS Health? The stock's valuation is almost certainly a big part of the story.
CVS Health currently trades at a forward price-to-earnings ratio of under 8.7x. To put that number into perspective, the S&P 500's forward earnings multiple is 19.7x.
There's one main reason behind CVS Health's discounted valuation. The company cut its full-year earnings guidance in May 2023. CVS reduced its earnings outlook by 10.5% at the midpoint of the range based on generally accepted accounting principles (GAAP). It lowered the adjusted earnings per share guidance by 2.3% at the midpoint of the range.
In CVS Health's Q1 update, executives discussed several factors that resulted in the lower earnings outlook. One was a change that removed some intersegment operating income eliminations. The company's acquisitions of Oak Street Health and Signify Health contributed to the revised forecast. CVS Health is also facing headwinds related to the restriction of discounts under Medicaid's 340B drug pricing program.
Overdeck, Siegel, Jones, and Asness seem to think that CVS Health will overcome these challenges. They're probably looking at the increased demand for health insurance and prescription drugs that the growing elderly population in the U.S. will likely drive.
Should you buy CVS Health stock, too?
Just because billionaire hedge fund managers have bought CVS Health stock doesn't automatically mean that you should do so as well. However, there are two types of investors that might want to consider CVS Health.
First, value investors will almost certainly like the stock's price. CVS Health is a bargain in an overall market that's priced at a premium.
Second, income investors could be interested in CVS Health. The stock's dividend yield currently tops 3.2%. CVS Health appears to be in a solid financial position to keep the dividends flowing.
On the other hand, I don't think that growth investors will find CVS Health all that appealing. The company isn't likely to deliver overly impressive revenue and earnings growth over the next few years. There are plenty of other stocks that growth investors will like a lot more than they would CVS Health.
