CVS Health's Recent Underperformance: A Strategic Buying Opportunity Amid Fundamentals and Earnings Outlook?

In the second quarter of 2025, CVS Health (CVS) has lagged behind the broader market, with its shares gaining just 2.5% compared to the S&P 500's robust 10.7% return. Over the past 12 months, the gap has widened further: CVS delivered a modest 6.2% total return, while the S&P 500 surged 10.5%. This underperformance has sparked questions about whether the pullback is a temporary setback or a sign of deeper challenges. For value-conscious investors, the key question is whether this dip represents a strategic buying opportunity amid improving fundamentals and a strong earnings outlook.

Valuation Metrics Suggest Undervaluation

CVS's forward price-to-earnings (P/E) ratio of 10.35 is significantly lower than the S&P 500's 18.56, signaling that the stock is trading at a discount relative to the broader market. Its PEG ratio of 0.91 further reinforces this narrative, indicating that the stock is undervalued when factoring in expected earnings growth.

This valuation discount is particularly striking given CVS's dual presence in the resilient healthcare and retail sectors. The company's pharmacy benefit manager (PBM) division, Caremark, continues to mitigate rising drug costs and enhance pricing transparency, while its retail segment benefits from steady demand for essential goods. Analysts argue that these structural advantages are not fully reflected in the stock's current price, creating a potential mispricing opportunity.

Strategic Initiatives Fuel Long-Term Optimism

CVS has implemented several strategic initiatives that position it for long-term growth. Key developments include:
- Margin Recovery: The company is redesigning Medicare benefits, adjusting Medicaid rates, and optimizing ACA market pricing to improve profitability. These efforts are expected to drive a 100- to 200-basis point margin improvement in 2025.
- Cost-Cutting Success: Aggressive cost management, such as converting over 90% of eligible Humira patients to biosimilars, has saved nearly $1 billion annually.
- Leadership Stability: CEO David Joyner's tenure has brought financial discipline and operational clarity, stabilizing Aetna's insurance operations and restoring investor confidence.

Despite these positives, the stock has faced near-term headwinds. Elevated medical costs in the Medicare Advantage segment and regulatory pressures—such as the proposed 2026 Medicare Advantage rate cuts—have weighed on sentiment. However, these challenges are largely seen as temporary. The company's Zacks Rank of #2 (Buy) and a strong analyst consensus suggest that earnings revisions are likely to stabilize in the coming quarters.

Weighing the Risks and Rewards

Critics highlight ongoing risks, including:
- Regulatory Scrutiny: New legislation banning pharmacy benefit managers (PBMs) from owning pharmacies could disrupt CVS's business model.
- Earnings Volatility: Q2 2025 earnings are projected to decline 19.67% year-over-year to $1.47 per share, driven by one-time charges and elevated medical costs.
- Market Sentiment: Broader market optimism about AI-driven healthcare stocks has overshadowed traditional players like CVS.

However, proponents argue that these risks are already priced into the stock. For instance, CVS's forward P/E of 10.35 implies a 38% discount to its 2025 earnings growth estimates, which analysts forecast at 12.92%. This suggests that the market is not factoring in the full potential of CVS's margin recovery initiatives or its undervalued retail segment.

A Case for Strategic Entry

The recent underperformance creates an attractive entry point for investors who can tolerate short-term volatility. CVS's discounted valuation, combined with its strong cash flow generation and strategic reinvention, offers a compelling risk-reward profile. The company's ability to navigate challenges—such as converting high-cost drugs to cheaper alternatives—demonstrates operational agility that is rare in the healthcare sector.

Investors should also monitor the July 31, 2025, Q2 earnings report for clues about the company's trajectory. A beat on revenue (projected at $93.72 billion) or positive guidance on margin recovery could catalyze a rebound. Conversely, a significant earnings miss might exacerbate the underperformance.

Conclusion: A Buy for Long-Term Investors

While CVS Health's stock has underperformed the broader market in recent months, the fundamentals remain intact. Its undervalued shares, improving margins, and strategic initiatives position it as a compelling opportunity for long-term investors. For those with a 3- to 5-year horizon, the current pullback offers a chance to buy into a healthcare titan at a discount, provided they are willing to navigate near-term uncertainties.

In a market where macroeconomic volatility and sector rotation dominate headlines, CVS Health's discounted valuation and robust business model make it a standout candidate for strategic accumulation.