Taking Stock: Sell CVS?

Dear Mr. Berko:
I bought 150 shares of CVS Caremark at $55 in early 2005. I now have 300 after the split several months later, and my cost is $28. I did not sell it in 2008 at $43 when you recommended it be sold, but I wish I had. Please tell me if I should sell it now (at a break even) or continue to hold it.
E.R., Elkhart, Ind.
Dear E.R.:
Yes, I recommended the sale of CVS (CVS — $30) in mid-2008, when it was trading at $42. And I can’t tell you why except for some reason, it didn’t feel good. And sometimes — considering today’s price — a gut feeling can be more accurate than logic or reason.

However, I must admit that my decision was encouraged by a discussion with a hedge fund manager who shorted CVS in August 2008. He told me then that he believed revenues would decline because CVS’s customer service was “worse than the post office” and pharmacy prices were higher than those at Walgreen (WAG — $29.25).

CVS is a $98.6 billion revenue drug store chain with 7,000 locations in 40 states and fills nearly 3 million prescriptions every day, or an average of 400 per store. And that’s a whole lot of pill bottles and white stick-on labels.

It seems that my hedge fund friend was right as rock salt. Revenue growth in 2009 and 2010 has been flat as a flapjack, as CVS shares fell from $44 to $30. When I spoke with him a month ago on another matter, he had covered half of his short position and expects CVS to fall to the low $20s; gad, I hope he’s wrong.

However, when the stock of a great company like CVS trades at a buck or two above its $28 book value, that’s compelling. Management has been a model of efficiency, as net profit margins have grown by 35 percent in the past decade, which is an impressive metric. Meanwhile, management plans to increase its store count from 7,000 to 8,300 in the coming four years. This could grow revenues to $120 billion, which is not unimpressive. And best of all, when CVS charges $15 for a 1 mg. Xanax pill that they buy from Pfizer for less than 3 cents, you know that management really understands how to make a buck. Certainly an almost 5000 percent markup on a popular brand name pharmaceutical is pretty good business. Wow, the local drug dealers in Miami are selling 1 mg. Xanax pills for 3 bucks a pop. I guess Pfizer gives the drug dealers a better price than it gives CVS.

CVS could fall to $25, but I think it’s a good long-term investment considering the fact that 70 percent of revenues derive from pharmacy sales, and in two years, the health care bill will add 30 million paying customers to the pharmacy market. CVS has solid finances, and its PBM business should be back on track in the next dozen months. So keep your 300 shares and post me a note a year from now.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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