Author: Noah Kiedrowski

CVS Stock Slump Despite Aetna Catalyst

Posted on by Noah Kiedrowski

CVS Health (CVS) wasn't immune from the market declines that were inflicted by the COVID-19 downturn. Despite being in the traditional defensive healthcare space and confined to domestic operations, the stock has not been able to break out and participate in the broader raging bull market post-CVOID-19 lows. The combination of CVS Health (CVS) and Aetna was proving to be a success after initial skepticism by investors. CVS even posted a string of better than expected quarters in part attributable to the Aetna acquisition. CVS is generating large amounts of free cash flow, paying down debt, and returning value to shareholders in a variety of ways. To further boost long-term growth prospects, restore growth, and fend off potential competition, CVS combined with Aetna. This combination creates the first through-in-through healthcare company, combining CVS's pharmacies and PBM platform with Aetna's insurance business. The new CVS combines its existing pharmacy benefits manager (PBM) and retail pharmacies with the second-largest diversified healthcare company.

CVS has been in a perpetual stock slump with or without COVID-19 in the backdrop. CVS has been beaten down for years, plummeting by over 50% ($113 to $52) from its multi-year highs. The stock currently sits at a bleak ~$58 per share and struggling to hold on to any share price appreciation despite the positive string of recent earnings with plenty of runway left in its growth from its Aetna acquisition. This was a bold and hefty price tag to pay yet necessary to compete in the increasingly competitive healthcare space, changing marketplace conditions, and political backdrop with drug pricing pressures. CVS made a defensive yet necessary acquisition to enable the company to go back on the offensive. At current levels, CVS presents a compelling investment opportunity; however, it has been a value trap for years despite the company still being in the early stages of its CVS-Aetna combination, which will drive shareholder returns for years to come.

Challenging Backdrop

The pharmaceutical supply chain cohort, specifically CVS, has been unable to obtain a firm footing in the backdrop of consolidation within the sector, negative legislative undertones, drug pricing pressures, rising insurance costs, and a market that has lost patience with these stocks. These factors culminated in sub-par growth with a level of uncertainty as the sector continued to face headwinds from multiple directions. Many of the stocks that comprised this cohort presented compelling valuations in a very frothy market. This allure had been a value trap as these stocks continued to disappoint. It's no secret that these companies have been faced with several headwinds that have negatively impacted the growth and the changing marketplace conditions have plagued these stocks. Continue reading "CVS Stock Slump Despite Aetna Catalyst" →

Seeing Beyond The Black Swan Event - Part 2

Posted on by Noah Kiedrowski

And just like that, the S&P 500, Nasdaq, and Dow Jones hit their all-time highs, and the COVID-19 market sell-off had been erased. Just before the COVID-19 pandemic struck the markets, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect, but they were ill-advised in what was an already frothy market with stretched valuations prior to COVID-19. I'm sure Ray Dalio quickly realized that his "cash is trash" mentality, and public statements were imprudent. The COVID-19 pandemic has been a truly back swan event that no one saw coming. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs.

The S&P 500, Nasdaq, and Dow Jones shed over a third of their market capitalization at the lows of March 2020. Some individual stocks lost over 70% of their market capitalization. Other stocks had been hit due to the market-wide meltdown, and many opportunities were presented as a result. Investors were presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I started to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It was important to put this black swan into perspective and see through this crisis on a long term basis while viewing COVID-19 as an opportunity that only comes along on the scale of decades.

Most Extreme and Rare Sell-Off Ever

The abrupt and drastic economic shutdown and velocity of the U.S. market's ~30% drop within a month bring parallels to the 1930s. This sell-off was extreme and rare in its breadth, nearly evaporating entire market capitalizations of specific companies. The pace at which stocks dropped from all-time highs was the fastest in history. The major averages posted their worst week since the financial crisis (Figures 1 and 2). The Dow had its worst month since 1931, and the S&P had its worst month since 1940. Continue reading "Seeing Beyond The Black Swan Event - Part 2" →

Facebook Advertising Boycott?

Posted on by Noah Kiedrowski

Facebook Inc. (FB) faced a very public onslaught of companies joining an advertising boycott across its social media platforms. However, its latest earnings suggest that this effort may have been largely symbolic and effectively inconsequential to the company’s revenue and growth numbers. The advertising boycott had grown to roughly a thousand groups and multinational companies. This presented a unique challenge that still has the potential to weigh heavier on the company since this boycott will directly impact revenue as overall compliance/security expenses swell. The magnitude of this boycott may inevitably influence the stock price if this movement expands in sheer numbers and duration. If Facebook can appease advertisers in a timely fashion, then this may be a temporary challenge as these companies rejoin the social media platforms. However, as advertising spending is abandoned indefinitely until further notice due to this boycott and overall spend slows due to COVID-19, this culmination could cast uncertainty around its stock valuation. Even though over 1,000-plus brands have fled its platforms, Facebook has an advertising moat. The breadth and depth of its advertising partners go far beyond this collection of ~1,000 groups and companies, which translates into only X% while the company still grew its revenue by 11% in Q2.

Q2 Earnings and 11% Revenue Growth

Facebook’s earnings for Q2 blew out expectations for both earnings and revenue with $1.80 vs. $1.39 expected and $18.7 billion vs. $17.4 billion expected, respectively. Daily active users were 1.79 billion vs. 1.70 billion expected, monthly active users came in at 2.7 billion vs. 2.6 billion expected, and average revenue per user came in at $7.05 vs. $6.76 expected.

These are blow out numbers across the board, and as expected, Facebook said that its user growth reflects increased engagement from consumers who are spending more time at home. Facebook has 3.14 billion monthly users across its platforms (Instagram, Messenger, and WhatsApp), compared to 2.99 billion in the previous quarter. The company forecast revenue growth for the third quarter of about 10%, beating analysts’ expectations for growth of 7.9% (Figure 1).

Better yet, Facebook said that through the first three weeks of July, its year-over-year revenue growth was about 10%. This forecast, while topping projections, takes into account ongoing headwinds, including economic volatility, the ad boycott, regulations around ad targeting and Apple’s upcoming iOS 14 operating system. Continue reading "Facebook Advertising Boycott?" →

Disney Streaming Negating COVID-19 Impact

Posted on by Noah Kiedrowski

Disney’s impressive streaming numbers have thus far negated the impact that COVID-19 has had on its other business segments, mainly its parks. The Walt Disney Company (DIS) has had to shutter all of its worldwide Parks and Resorts, and ESPN has been hit with the cancellation of virtually all sports worldwide. Advertising revenue coming through its media properties has been hit as companies scale back ad spending. All of its movie studio productions have been halted, and movie releases are postponed. Despite the COVID-19 headwinds, streaming initiatives have been major growth catalysts for the company. Disney+’ growth in its subscriber base has shifted the conversation from COVID-19 to a durable and sustainable recurring revenue streaming model. This temporary bright spot, in conjunction with the optimism of its Park and Resorts coming back online, has been a perfect combination as of late. Disney+ has racked up 57.75 million paid subscribers, Hulu has 35.5 million paid subscribers, and ESPN+ has 8.5 million paid subscribers. Disney now has over 100 million paid streaming subscribers across its platforms. Disney+ has been wildly successful via unleashing all of its content (Marvel, Star Wars, Disney, and Pixar) in what has become a formidable competitor in the ever-expanding streaming wars domestically and internationally. Hence the tug-of-war on Wall Street between COVID-19 impacts versus the success of its streaming initiatives. Thus far, its streaming success has changed the narrative as its stock is approaching highs not seen since February. Disney is a compelling hold as its legacy business segments get back on track in conjunction with these successful streaming initiatives.

Long Game

Disney’s business segments will regain their health as COVID-19 subsides worldwide and/or there’s a vaccine approved. Parks will reopen as seen with Shanghai, Hong Kong, and Disney World. Inevitably, movie productions will resume, movie theaters and resorts will reopen, and sports will play-on. The resumption of all of these activities will feed into Disney’s legacy businesses in conjunction with its streaming successes. Disney continues to dominate the box office year after year with a long pipeline of blockbusters in the queue. Its Parks and Resorts continue to be a growth avenue with tremendous pricing power outside of COVID-19. Disney is going all-in on the streaming front and acquired full ownership of Hulu, and the company has launched its Disney branded streaming service with tremendous success with kudos from Reed Hastings. I feel that the company offers a compelling long-term investment opportunity given its growth catalysts that will continue to bear fruit over the coming years despite the current headwinds. Continue reading "Disney Streaming Negating COVID-19 Impact" →

The Financial Cohort and COVID-19 Dynamics

Posted on by Noah Kiedrowski

COVID-19 ushered in the real possibility of widespread loan defaults, liquidity issues, ballooning credit card debt (as banks hold the liability), and stressed mortgages. To exacerbate these COVID-19 impacts, a delicate balance between interest rates, Federal Reserve actions, potential yield curve inversion, and liquidity must be reached. The customer side of the business continues to be worrisome as the duration of this crisis continues to drag on with no signs of slowing. A segment of the consumer base is faced with lost wages and the real possibility of not being able to meet their financial obligations (i.e., car payments, mortgage payments, etc.), which will unquestionably have a negative impact on revenue and earnings for banks. The financial cohort is in a difficult space as the broader economic backdrop continues to dictate whether these stocks can appreciate higher. The initial shock of the COVID-19 pandemic resulted in the market capitalizations of many large banks to be cut by ~50%. Some of the largest banking institutions such as Citi (C), Goldman Sachs (GS), JPMorgan (JPM), and Bank of America (BAC) were sold off in the most aggressive manner since the Financial Crisis a decade earlier. As COVID-19 continues to drag in both spread and duration, share buybacks have now been halted, and dividend payouts arrested. The stability of dividend payouts is now in question as uncertainty continues to cloud this sector. Moving forward, how durable are the major financial names at these depressed levels, are the banks investable in light of the COVID-19 backdrop?

Recent Federal Reserve Stress Tests

The Federal Reserve put new restrictions on the banking sector after the results from the annual stress test found that several banks could get too close to minimum capital levels in potential scenarios tied to the COVID-19 pandemic. The largest banking institutions will be required to suspend share buybacks and arrest dividend payments at their current level for Q3 of 2020. For the first time in the 10 year history of these stress tests, banks are now required to resubmit their payout plans again later this year. This move is indicative of the unique and unprecedented landscape of the COVID-19 pandemic. Continue reading "The Financial Cohort and COVID-19 Dynamics" →