After you receive this Alert, we will be initiating a position in CVS Health Corp (CVS) , buying 500 shares at roughly $81.48. Following the trade, CVS will represent 1.51% of the portfolio

We are bringing CVS out of the bullpen and into the portfolio as our recent sales of 3M (MMM) and Emerson Electric (EMR) have made room for this additional name and provided us with plenty of dry-powder to put to work. It also fits the repositioning of the portfolio Jim discussed on Monday's Daily Rundown here and the need to become less weighted to industrials leveraged to the global economy and more exposed to domestic. CVS fits several themes that we are on the hunt for in this market, and it is unique in that its revenue exposure is domestic, it will be in health insurance through its upcoming acquisition of Aetna (AET) , and it has a strong presence in retail as well.

The company's third quarter earnings release can be found here. Also, the 2017 Annual Report presentation can be found here. For more details on the company's acquisition of Aetna, please see the press release here.

Our bullish thesis in CVS is mainly predicated on:

  1. We believe the company's upcoming acquisition of Aetna represents a key catalyst for CVS. The deal is expected to close before Thanksgiving and it has already received approval by the Department of Justice. The company needs approval from just five more states.
    • Once combined, we like this deal for both the $750 million in near-term cost synergies and the value creation as a result of growth.
    • The benefits to the consumer will be real as the company will have formed what they call a "uniquely integrated, community-based health care experience."
    • In addition, the combination of Aetna's network with the more than 9,700 CVS Pharmacy locations and 1,100 MinuteClinic walk-in clinics will create a more personalized health care experience for customers.
    • Further adding to the value proposition that the deal creates, management plans to tirelessly work to improve patient health at lower costs by leveraging a broader use of data and analytics.
    • Lastly, we know the health insurance space is a winner (especially post-midterms) through our investment in UnitedHealth Group (UNH) , and this investment increases our exposure to the industry.
  2. With 100% revenue exposure to the United States, CVS Health Corp is levered to the domestic economy and its retail pharmaceutical exposure is insulated from a slowdown in global growth. We believe this is a quality investor will be willing to pay up for due the current trade rhetoric.
  3. We believe the management team at the company is strong and dependable.
  4. The stock's price-to-earnings multiple remains below its 5-year average despite a solid fundamental backdrop-this should limit volatility in an up-and-down market.
  5. Consistent dividend payment. Although the share repurchase program and dividend increase remain suspended post-acquisition until the company achieves a leverage ratio in the low 3x adjusted debt to EBITDA, our current entry point provides with a solid ~2.50% yield.

We are starting relatively small in CVS as we, of course, want to leave room to scale into the position over time. Shares had a nice pop after the company produced better than expected results on November 6th, and we want to allow time for the position to settle. While we believe the stock has significant room for upside, we also recognize that the integration process of Aetna comes with a degree of uncertainty. Furthermore, there have been worries of Amazon (AMZN) entering the pharmaceutical space for years now, and it has been one of the main reasons why the multiple on shares remains depressed at around 10x-12x next year's earnings. However, CVS has proven through earnings that its previous selloff related to Amazon's acquisition of PillPack was overblown. Also, we believe the consistent dividend payout compensates shareholders to wait while the integration process plays out.

We are initiating the position with a $95 price target, reflecting just under 12 times consensus 2019 earnings per share. That being said, we believe there is room for upside here on consistent earnings growth and multiple expansion towards a more historical average as investors build-in a premium for this diversified pharmacy/healthcare retailer that is integrated with a major managed care operation.