Looking to invest in these turbulent times and worried about the effect of the COVID-19 epidemic on business? Consider CVS Health (NYSE: CVS), which has been in a slump in part due to uncertainty about health care’s future, given pushes for single-payer systems or expanded Medicare.
There are several possible catalysts for its further growth. For starters, the COVID-19 scare may lead to increased foot traffic in its stores. The company is planning to open 1,500 HealthHUB health clinics around the country by 2021. And pharmacy revenue might be rising, due to increased illness, with pharmacy sales offering fatter profit margins than sales in the rest of the drugstore.
Meanwhile, CVS Health’s 2018 acquisition of health insurer Aetna should continue to pay dividends. Health scares tend to provide a wake-up call to the uninsured to become insured.
CVS Health’s fourth-quarter revenue of $66.9 billion was up 22% year over year, and management is optimistic for 2020.
On top of all that, shares have been attractively priced recently, down more than 20% from their 52-week high, and with a price-to-earnings (P/E) ratio in the low teens — when the five-year average P/E ratio is 19. Even better, there’s a tasty dividend that recently yielded 3.7%. (The Motley Fool has recommended CVS Health.)
Ask the Fool
Q: I read that Groupon is considering a “reverse split.” Is that good? – T.D., Fairbanks, Alaska
A: Nope. Reverse splits are typically executed by struggling companies. Groupon fits that bill, with its stock recently trading around $0.83 per share, down from $26.11, where it closed on its first trading day in 2011.
In its last reported quarter, Groupon’s revenue sank by 23%, more than was expected, and revenue has been shrinking for several years in a row now.
Stocks with shares trading for less than about $5 apiece are penny stocks, often volatile and risky, so Groupon’s price doesn’t look too good these days.
A reverse split is a way to artificially inflate a stock’s price. If Groupon reverse-split 1-for-100, for example, a shareholder with 300 shares would suddenly have 3 shares — and if the stock price had been $1 before the reverse split, it would be proportionately higher post-split, at $100 per share. Notice that the value of the shareholder’s stock doesn’t change: 300 times $1 is $300, and 3 times $100 is also $300. It’s just the stock price that has changed, looking “better” at $100 than it did at $1.
Q: Can you explain the “efficient market hypothesis”? – C.G., Johnson City, Tennessee
A: The efficient market hypothesis, sometimes referred to as the efficient market theory, suggests that all (or most) available information is factored into the price of stocks. Therefore, various stocks can’t be over- or undervalued, and investors can’t outperform the overall market consistently due to their smarts and skills.
Critics of the hypothesis see the stock market as somewhat inefficient (with many investors acting on emotions, not data), and point to some very successful market-beating investors as proof.
My dumbest investment
My dumbest investment occurred in 2010, while I was still in college. I invested $700 in Pulse Beverage, a penny stock that’s now worthless. I’m afraid to calculate what I would have instead if I’d invested that money in Amazon.com, Apple, some big banks or other more reputable companies over the past decade.
At least I’ve learned some good lessons: stay away from penny stocks, be patient and follow the smart. – J.M., online
The Fool responds: It’s good that you learned to avoid penny stocks while you’re still young, as you only lost $700. If you were older and richer, you might have lost thousands of dollars, as many have done.
What would $700 have grown to from 2010 to 2020 in some other stocks? Well, it would have topped $9,000 and $7,000 in Amazon.com and Apple, respectively, and in either Citigroup or Bank of America stock, it would have grown to more than $1,700. (These examples all reflect any dividends being reinvested.) Simply parking that $700 in a low-fee S&P 500 index fund, without having to study or keep up with any stocks, would have left you with shares worth around $2,000.
Pulse Beverage, which at one point was selling fruit-flavored drinks, more recently announced plans to launch CBD-infused drinks. It’s best to avoid penny stocks – but if you must consider one, at least research it deeply, and skeptically, before buying.
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