There have been rising concerns regarding the disconnect between the stock market and the economy. According to many analysts, the market’s rally over the past 10 months could prove to be another stock market bubble that could lead to another correction in the near term.
On the other hand, a nationwide coronavirus vaccination drive and the gradual resumption of industrial and economic activities is raising hopes for a solid economic recovery this year. As such, investors have begun rotating away from expensive growth stocks into potential turnaround candidates.
The recent outperformance of value stocks is evident in the SPDR S&P 500 Value ETF’s (SPYV) 13.7% return over the past three months versus the SPDR S&P 500 Growth ETF’s (SPYG) 8.1% gain and the SPDR S&P 500 Trust ETF’s (SPY) 5.4% return. Analysts believe this trend can continue with a vaccine-driven economic recovery this year.
CVS Health Corporation (CVS) and Allstate Corporation (ALL) are currently trading at discounts to their peers and, we think, possess solid revenue and earnings growth potential. So, it could be wise to pick these undervalued stocks right now.
CVS Health Corporation (CVS)
CVS operates retail specialty pharmacy stores, and provides health services and plans in the United States. As part of its mission to create an integrated healthcare business, CVS has forged a new, bold business model that unites its retail franchise and long-standing pharmacy benefits management (PBM) unit, Caremark, with giant health insurer, Aetna. The company functions through the following segments – Pharmacy Services, Retail/LTC and Health Care Benefits.
In terms of forward P/E, CVS is currently trading at 10.26x, which is 65% below the industry average of 29.29x. In terms of trailing-12-month P/S, CVS’ 0.38x is significantly lower than the industry average of 8.01x.
CVS recently introduced the Symphony medical alert system to help caregivers monitor the safety and well-being of seniors at home. CVS also recently collaborated with Cancer Treatment Centers of America (CTCA) to increase access to chemotherapy at home. In addition, , the company has launched several new healthcare products and services under its HealthHUB initiative. Its stores provide medical, health and behavioral support services targeted at people with chronic diseases.
CAT’s revenue and EPS grew at a CAGR of 1.2% and 59.3%, respectively, over the past three years. In its last reported quarter (the 3rd), the company reported a top-line of $67.1 billion, an increase of 3.5% year-over-year, driven by growth in the Health Care Benefits and Retail/LTC segments. The company doubled the number of its coronavirus test sites to more than 4,000 CVS Pharmacy locations nationwide during the quarter. However, its adjusted EPS came in at $1.66, compared to the year-ago value of $1.84.
CVS implemented several changes during the pandemic to accommodate the new normal, such as curbside and in-store pickups at select locations. After playing an important role in COVID-19 diagnostic testing, CVS is now set to play a critical and leading role in the administration of the biggest vaccination program of the nation. Analysts thus expect CVS’ revenue and EPS to grow 3.8% and 1.3%, respectively, this year.
How does CVS stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating.
You cannot ask for better. It is ranked #1 of 6 stocks in the Medical – Drug Stores industry.
Allstate Corporation (ALL)
ALL is the nation’s largest publicly held insurer for personal lines that also provides property and casualty and other insurance products in the United States and Canada. The company operates through Allstate Protection, Service Businesses, Allstate Life, and Allstate Benefits segments.
ALL’s forward P/E ratio currently stands at 8.60, which is significantly lower than the industry average of 13.58. In terms of trailing-12-month P/S, the stock is currently trading at 0.77x, which is 76.3% lower than the industry average of 3.26x.
ALL has recently closed a $4 billion acquisition of National General Holdings Corp., a specialty personal lines insurance holding company that serves a network of approximately 42,300 independent agents for property-casualty products. The deal is part of ALL’s strategy of growing personal lines insurance and will deliver a 1% increase in its market share.
ALL’s revenue and EPS have grown at a CAGR of 4.6% and 25.6%, respectively, over the past three years. In its most recent reported quarter (3rd), the company delivered revenues of $11.5 billion, increasing 3.9% year-over-year and reflecting a 1.9% increase in Property-Liability insurance premiums earned. Its Property-Liability underlying combined ratio came in 79.7, compared to a year-ago value of 86.3. ALL reported an adjusted EPS of $2.94, rising 3.5% from the prior-year value.
ALL’s total policies in force increased 27% over the last 12 months, reflecting strong growth by Allstate Protection Plans and modest growth in Property-Liability policies. In fact, the Property-Liability underlying combined ratio has been excellent over the past year.
ALL’s focus on transformative growth should l further increase its market share by expanding customer access and improving customer value. Wall Street analysts expect ALL’s revenue and EPS to grow 12.6% and 5.7%, respectively, this year.
ALL’s POWR Ratings reflect a promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade and Industry Rank, and a “B” for Buy & Hold Grade. Among the 70 stocks in the Insurance – Property & Casualty industry, it is ranked #20.
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CVS shares were trading at $75.41 per share on Tuesday afternoon, down $0.85 (-1.11%). Year-to-date, CVS has gained 10.41%, versus a 1.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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