CVS and Hewlett Packard

I remain long both CVS and Hewlett Packard, despite the fact that I am no longer bullish on the overall market. In their own way both stocks typify the types of value stocks I am willing to own.

CVS is probably the best example of the type of stock I like to own:

  • CVS operates in the drugstore and pharmacy benefit management business, which has little economic sensitivity. I worry about the economy because of the imbalances that were not dealt with during the last recession and prefer stocks with little economic sensitivity.

  • CVS trades at less than twelve times 2012 estimates.

  • CVS is returning cash to shareholders. CVS has committed to $2 billion in share repurchases in 2011 and even more next year in addition to paying a dividend.

Hewlett Packard has some hair but falls in the too cheap to ignore category:

  • While HP does have economic sensitivity, it also has some steadiness due to its consulting and software business where contracts are generally longer term.

  • HP trades at less than 8 times 2011 estimates and a little over 7 times 2012 estimates.

  • The management has not committed to returning cash to shareholders and its possible that they will continue to do value destructive acquisitions.

In contrast to CVS's management, I don't believe HP's management is acting in the best interest of shareholders. HP's management can destroy shareholder value at any time without notice. However, at 7 times 2012 earnings estimates there is a big buffer. I would not be holding HP if it traded at a similar multiple to CVS.

In summary, both HP and CVS are representative of the types of stocks I like to own. CVS is trading at a very good valuation and management is taking the right steps. At HP management is a wild card but the ridiculously cheap valuation makes up for management.

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