You can see below my original post on Berkshire board linked below. This is a quick take. Subsequent to my post, the stock has gently declined to $88. The 3 main thesis I put for CVS are:
They will be able to spend $10 B on buybacks
They will be able to reduce debt by $10 B
They will be able to invest $10 on the business
Buybacks So far they have done $1.5 B in buybacks in 2022 and have another $2B accelerated buyback in works. Now they are scaling their buybacks to dilution + 1% ~ 2% share count reduction, taking mid-point you can expect about 20 million share purchases. Clearly, this is a reduction from their original guidance due to Oak street health purchase. Of course they have increased the dividend by 10%. So when the share price goes down companies find a way to increase dividend, instead of buying back more shares! I am sure they have a reason for that.
Debt reduction They modestly reduced debt, but they have an ability to hit the $10 B debt reduction goal by end of 2025. We need to see.
Invest in business You can always count on corporate America on empire building. They are buying OSH for $10 B cash. At least they are not issuing shares. So, the business is going to take more than $10 B, since they will make some additional investments in the next 2 to 3 years. Most likely they may end up with $6 to $7 B share buybacks and probably around that level of debt reduction.
Separately, OSH purchase means EPS hit between now and 2025, hopefully not an hit to their cash flow. I am yet to go over the annual results. For now, bit disappointed.
The stock declined further to my last post and is clearly now below 200 DMA and in oversold condition. I use this slightly different, not a signal to buy for the bounce but the stock is in significant decline and will continue to decline. Other than the buybacks are going to meaningfully decline, nothing is new from OSH purchase. The management has been talking about strategic M&A for few quarters, so it is not like the market got blindsided.
If $80 is not holding, then hello $70. I will be selling one $80 put with an intention of taking the stock, if assigned and concurrently buying $80 put (to protect) and see if the stock can bounce back. This is mainly because I am expecting overall market to bounce back in March. The risk the stock could bounce back and my $80 put may just expire without getting assigned and I just collect $20 or $30.
My $80 puts were assigned and immediately I sold $60 Jan 2024 calls, even though my initial reaction was $70 might hold, I decided to go much deeper to give some time to see where it bottoms. If the stock starts moving sideways, I will consider closing the call and book profits on the call. Still waiting to see where it bottoms.
Selling $60 call meant the call price matched $1 to $1 stock price decline or near 1 delta. I closed the call by buying back and booking profits around $67. The stock has entered sideways movement or consolidation phase and the fundamental story is not getting bad. The price is attractive from fundamental point of view and stock stopped sliding from technical point of view. So a good time to close the call. Actually I have done this on number of other covered calls, and bought outright calls on banks, and few other names.
I could not think of any time in the last 10 years when I was fully invested like now.
