$Stock*Shop*Charts*News*Option$

[EZ2]

How to Play CVS Investor Day With Stock Options -- Barrons.com

DOW JONES & COMPANY, INC. 5:59 AM ET 5/21/2019

CVS's mighty ambitions have failed to inspire much respect among investors. Its stock is down some 19% this year even as the company's leaders say they want to fix America's chaotic health care system.

CVS (CVS) operates more than 9,900 stores in 49 states, Washington DC, Puerto Rico and Brazil. In November, the company bought health insurer Aetna -- the completed deal is still facing some scrutiny -- and it also sells pharmaceuticals through a Caremark unit. In America, CVS fills more prescriptions than anyone else, which is significant considering the vast majority of Americans need prescription drugs.

And yet CVS stock is so poorly regarded that it is not uncommon for institutional investors to say that expectations are so low for the company that the stock could rally on a glimmer of good news. This proved true earlier this month when the stock jumped on decent earnings news, though it has since slumped yet again, and the stock is now on the verge of setting a new 52-week low.

A key short-term test for the company comes June 4 when the investment community gathers for CVS' annual investor day meeting. The company just reported good earnings, which gave the stock a temporary boost, and now management gets to spend a day convincing investors and analysts that the CVS story is achievable, and the stock is undervalued.

In anticipation that the stock rallies, JPMorgan is telling clients that CVS' upside calls are priced without any " event premium." This essentially means that options dealers are pricing CVS calls as if the stock will not do much of anything in response to the investor day presentations.

JPMorgan's analyst, Lisa Gill, however, thinks the stock will respond favorably. She thinks the company is likely to provide details on long-term growth targets and corporate strategy following the Aetna merger. Of course, a federal judge has scheduled a three-day hearing on the Aetna merger on June 3. The hearing will determine if the merger is in the public interest. The reviews are usually just part of the process of reviewing mergers but concerns about health care raises the odds that the hearing is more than a formality, which could overshadow Aetna's investor day meeting if the merger is called into doubt.

Still, Shawn Quigg, a derivatives strategist, is advising clients to buy inexpensive calls on CVS. If the stock rallies, the calls increase in value.

With the stock at $52.30, Quigg told clients to consider buying the June $52.50 calls that expire June 14 for $ 1.58. At $55, the calls are worth $2.50. Should the stock be below $52.50 at expiration, the money spent on the trade is lost. During the past 52-weeks, the stock has ranged from $51.72 to $82.15.

To be sure, CVS stock pops higher from time to time in reaction to corporate events, which could bode well for the analyst day trade, but mostly investors are leery. So be mindful of the legal proceedings and treat CVS stock and options like one of the company's minute clinics. Stop by. Hang out for a bit. See what happens and take off. If you win, good on you. If you lose, well the calls were cheap and you knew the risks before you arrived.

Steven M. Sears is the chief investment officer at StratiFi Technologies.


(END) Dow Jones Newswires
05-21-190559ET
Copyright (c) 2019 Dow Jones & Company, Inc.