Retail chain CVS Health Corp. (CVS) got pummeled in Tuesday’s pre-market, dropping more than 13% after missing third-quarter revenue estimates and lowering guidance for fiscal years 2016 and 2017. The drug giant cited a retail prescription exodus that could top 40 million scripts in reaction to recent changes in the pharmacy network marketplace. The decline is set to drop the $90-billion powerhouse to a multi-year low.
CVS’s shortfall may stem from a controversial drug exclusion list released in August, listing 29 high-priced formularies it would not cover under its 2017 pharmacy benefit plan. In contrast, rival Express Scripts Holding Co. (ESRX) excluded just five drugs for 2017, suggesting that startled members aggressively sought out alternatives and found new plans with relative ease. If so, the company may have undermined several years of growth, sounding alarms for current shareholders.
CVS Long-term Chart (1993-2016)
The stock struggled in the first half of the 1990s, caught in a downtrend that reached an 8-year low in the single digits in January 1996. It then entered a new uptrend, gaining ground at a steady pace into the 1999 high at $29.19. The subsequent trading range broke support in the mid-teens after the September 11 attacks, with the decline finally coming to rest at $11.16 in 2003.
It took two years for the subsequent bounce to reach resistance at the millennial highs and another year for a breakout to unfold. That uptick failed to catch fire into 2008, stalling just 11-points above the prior peak, ahead of a steady decline during the economic collapse. The stock posted the third higher low in 12-years and turned higher into the new decade, with bears taking control once again and ending the recovery well-below the 2008 high.
A 2012 breakout finally attracted strong buying interest, lifting price in a graceful uptrend that culminated at $113.58 in August 2015. The bottom dropped out a few weeks later during the mini flash crash, with a rapid descent into the low 80s followed by a lower high in October. An attempt to mount that resistance level in May 2016 failed, attracting competitive selling pressure and a low motion decline that dropped price into a test of last year’s low near $80, just ahead of this week’s earning shock.
CVS Short-Term Chart (2014-2016)
The August 2015 plunge extended a trading range that contained price action for more than 14 months ahead of Tuesday morning’s violent selloff, with the stock set to open the regular session in the low 70s. This marks a classic double top breakdown that signals the start of a secular downtrend lasting for months or years. The decline is also set to break the 200-week EMA, which has offered support since 2011. There are few obvious support levels until the .618 Fibonacci rally retracement at 58, so that marks a logical downside target.
On Balance Volume (OBV) peaked with price in the second half of 2015 and turned lower in a steady distribution wave that quickly undercut the August 2015 low. The May bounce failed to staunch the technical bleeding, with the indicator continuing to post new lows into this week’s report. The highly bearish volume pattern confirms that smart money has been exiting the stock for months, getting out of the way of the new downtrend.
The Bottom Line
CVS is set to break two-year support at $80 on Tuesday, after a poorly received earnings report raised major doubts about growth metrics after a controversial 2017 pharmacy benefit plan triggered a member exodus. As we’ve learned with Chipotle Mexican Grill Inc. (CMG) and other companies that made bad business decisions, it can be very hard to rebuild loyalty and get back lost customers.
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