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Rhode Island Red Zone! Woonsocket Drug Dealer Can’t Get a Fix! (CVS)

Posted on December 23, 2021

 

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Today’s trade is based on the pharmacy giant criminals at CVS (NYSE:CVS) and their Woonsocket, Rhode Island cast of rogues.

Why?

First, because the pharmacists are taking a beating.

And second, because we don’t like rogues.

Atta Girl!

As for the sector, consider the following –

  • Competitor Rite-Aid is shuttering 63 stores in the coming months.
  • Walgreens is in the midst of a gigantic 200 store closure plan.
  • And our Woonsocket swindlers announced last month that 900 stores (!) would be closed over the next three years.

Of course, market reaction to these announcements is positive at first, because, you know, “all the savings” and “accretive to earnings” and the like.

But that’s just at first.

Then the stock tops out.

But how, if the fundamentals are sound!?

Yes, sound they are, relatively –

  • P/E is 17.59,
  • Annual Yield is 1.98%, and
  • Price to Book is 1.79.
  • But next year, earnings are only expected to grow by 2.75%, according to consensus estimates.
  • And insiders cashed out of $30 million in stock in the last half year – finishing their selling just as the store closure announcement went public.

So what gives?

Sliding rocks around like that…  The very thought!

Anyway, CVS has profited nicely over the last year from Batflu testing and vaccinations, but now that “Covid Optimism” has struck, we’ll likely see a curtailing of that revenue source.  Overall retail pressures and tough competition in the sector will also make it difficult for the stock to keep its recent gains.

In short, we say the jig is up.

And we don’t believe its ownership of insurer Aetna will help matters significantly.

Until rates start rising quickly, insurers are also stuck.

Now take a look at the chart –

Technically, we see a firm top in place, and significant declines over the near term.

How so?

  1. First, we have an overbought RSI read from early November (in green), and
  2. A MACD indicator that’s fast rolling over.  The first indicates when the topping process began, while the second should contribute to immediate near-term selling.
  3. The actual top-out was signaled first by last weeks’ bearish engulfing pattern (enlarged, in black), …
  4. And then by the double-Doji pattern of the last two trading sessions (in red), which speaks to profound uncertainty, and – when it appears at the end of a strong run higher – an imminent reversal.
  5. Fibonacci retracement calculations bring price lower to 84, and then potentially 73. The former aligns with the rising 274 day moving average, a line that hasn’t been touched for 13 months.

And it’s for all the foregoing that we now recommend the following –

A Jew and His Gold recommends you consider the sale of the CVS May 20th 100/105 CALL spread* for a credit of $1.95 (6.35/4.40) and purchase of the CVS May 20th 97.50/87.50 PUT spread** for $3.22 (5.30/2.08).  Total debit on the affair is $1.27.

[*Sell the 100 CALL and buy the 105 CALL.  **Buy the 97.50 PUT and sell the 87.50 PUT.]

Rationale: we like the $1.27 outlay to gain a max profit of $8.73 (687%).

We also like the time horizon on offer of five months.

Max loss is $6.27 (difference between the CALL strikes plus the initial credit).

Very tight spreads on the options give us a great entry.

We’ll likely close on first sign of a decline to our target area of 87/88.

The Book of Redemption opens this Shabbat.  May we all be on board!

Many happy returns,

Matt McAbby

 

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