4. CVS Health Corporation (NYSE:CVS)
Number of Hedge Fund Shareholders: 77
There was an 11% rise in hedge fund ownership of CVS Health Corporation (NYSE:CVS) during Q1, giving the stock more smart money shareholders than it’s ever had save for the fourth quarter of 2018, when ownership briefly spiked by more than 50% before several funds sold off their shares again the following quarter. Several quant funds are major shareholders of CVS, including Two Sigma Advisors, Renaissance Technologies, and AQR Capital Management.
CVS Health Corporation (NYSE:CVS) shares are down around 52-week lows in the wake of the company losing out on a $35 billion pharmacy benefits management contract for 2024, which the company expects will result in a $2 billion impact next year. On the positive side of the ledger, CVS’ insurance business Aetna grew revenue by 12% year-over-year in Q1. The recent share slump has also made CVS’ dividend, one of the best in the industry, quite a bit more attractive, as shares now yield 3.39%.
Greenlight Capital got burned on CVS Health Corporation (NYSE:CVS)’s acquisition of Oak Street Health, despite trying to talk the former company out of the deal according to the fund’s Q1 2023 investor letter:
“Second, we will discuss Oak Street Health (OSH), which we closed out after costing us 0.8% (net) during the quarter. CVS Health Corporation (NYSE:CVS) is buying OSH for $39 per share, or about $10 billion. When shorting, there is always the risk that someone with deep pockets will buy out the company at a silly price, or maybe even at twice a silly price. CVS is worth $115 billion (or it was the day they announced the deal; subsequently, CVS’s shares have fallen and it’s now worth $93 billion), so it can afford to piss away $10 billion.
OSH is in value-based care, which has become a trendy segment of the market. Most of the “value” comes from doing a more thorough and aggressive job of documenting how sick a patient is, so as to maximize Medicare payments. OSH operates 169 clinics (costing between $1.5-$2 million to build) in mostly lower income neighborhoods and employs 600 doctors. CVS projects that in 2026 the pro forma entity will have 300 clinics and “embedded EBITDA” of $2 billion, plus over $500 million of synergies.
In 2022, OSH generated less than $1 million of adjusted revenue per doctor2 and lost $500 million (almost $3 million per clinic). Even if it triples the number of doctors by 2026, it will need over $1 million of “embedded EBITDA” per doctor, implying margins shifting from a loss to nearly 100%. Obviously, this can’t happen, as the doctors need to be paid and there are other substantial costs. The amazing thing is that when rumors of this deal circulated, we reached out to CVS management and had a call where we walked them through the math… and they went ahead with the deal anyway. When the proxy came out, it revealed that OSH conducted an auction and, like a late-night eBay shopper who had one too many glasses of wine, CVS raised its uncontested bid several times… Rant over.”
