Thread by @Life21Good

$CVS remains my top large cap pick here. I think Buffett letter this weekend was the most bullish thing I’ve read for value stocks in a long time. He basically said bonds are the worst investment here and that Wall St never gets tired of story stocks. This is a toxic statement if

by #Buffett if you’re a growth investor that has just come off a hell of a decade. Now getting back to CVS. Currently trading at a FCF yield of >12% i.e. printing money. What many people don’t realize is this is a subscription business. Here me out for a second. Their PBM which

is the arm of the business that manages drug spend for employers has a 99% retention rate and built in growth in spend. We’re talking the largest companies in the world along with government programs such as Medicaid. They retain year in and year out 99% of current customers.

Show we a SAAS company with that kind of retention. Where it gets better is they have retail stores unlike their competitors. Wait I thought brick and mortar was bad? Yes of course they aren’t going to ever be Target but what they will be is a destination for health.

Their strategy is two-fold 1) Leverage their PBM to offer customers the best pricing if they restrict network for drugs to CVS. There is a CVS within a few miles of everyone in US so employers shouldn’t mind telling their employees they have to fill at CVS or by CVS mail for

Lower prices. That’s the goal for everyone right? And if employers want an open network and are willing to pay CVS more for that win either way. 2) 2nd part of strategy is to leverage Aetna to move towards high margin health services through CVS Health Hubs and $0 co-pay. Let’s

say you’re a parent and your kid has an ear infection. 1) Telemedicine like $TDOC isn’t going to do shit for that. You could call your pediatrician but you’re best bet is typically urgent care. Sure there are things like Little Clinic in $KR but you’re looking at a minimum $75.

With Aetna and their new $0 co-pay plans you can take your kid to CVS and Health Hubs at no out of pocket cost. Then as you’re walking out you can buy your kid a treat and pickup a bottle of wine for yourself while you’re at it because it’s been a rough night at that point.

So their retail isn’t looking so bad at this point anymore. What’s better is employers typically offer drug and health insurance coverage which conveniently $CVS now sells. No competitors in this space have stores as $WBA ain’t in the PBM or Health Insurance business. So not

only are those subscription 3 year drug and health coverage not going to drop below 99% retention but they are going to be stealing customers left and right from $UNH who can’t go build stores a few miles from everyone in the US. Right now the strategy is just beginning to play

out and you can literally buy cheapest stock in the $SPY (<10x P/E) with a FCF yield of >13% or you can go buy $TSLA with no prayer of 13% FCF trading at a crazy P/E in the face of rising bond yields. I’m going to take a page out of Buffett’s letter and be an investment in CVS

with this kind of margin of safety works out ok over the next decade.