A Contrarian View of CVS and Danaher (CVS, DHR)

Nick Perry writes a regular column for Schaeffer's Investment Research in which he monitors media sentiment on a stock as a contrarian indicator. When the media is positive, it's time to sell; when the media is negative, it's time to buy. Here's his analysis of a recent CNN Money article about CVS (ticker: CVS) and Danaher (ticker: DHR):

Publication: CNN/Money
Publication title: Changes to the Sivy 70
Publication date: 11/1/2005

Brief Summary:

"Both of the companies I am adding have sold off a bit since August, chiefly because of concerns that earnings may run below trend for the next quarter or two." This article offers optimism on Danaher (DHR) and CVS (CVS) saying they have been added to "a list of stocks that potentially offer above-average long-term returns." Here is a summary of the bullish arguments:

• "CVS earnings are projected to grow at a 13 percent compound annual rate over the next five years, compared with 16 percent for Walgreen. If CVS can improve its growth at all, the stock's 15 P/E could support a multiple closer to Walgreen's 22."

• "Danaher is a well managed industrial conglomerate that operates in a number of niche businesses....Results for the current quarter are expected to be a bit soft. But earnings per share are still expected to rise 12 percent next year and grow at a 15 percent rate after that. The shares trade at less than 17 times estimated 2006 profits."

Contrarian Takeaway:

As readers know, we view fundamental analysis as just part of the picture and feel that sentiment and technicals need to be added for a full analysis. This overall view is what our proprietary Schaeffer's Equity Scorecard seeks to cover. Unfortunately, the scorecard doesn't offer an encouraging view on either stock as CVS garners an overall score of just 3.0 out of 10, while DHR fares only slightly better with an overall score of 4.0. Also, regular readers of this space might have noted that neither of these stocks is new to optimism as these prior columns have discussed.

• Optimism Runs High on Danaher
• Down on the Pharm

• Want a New Drug Retailer?

With optimism running high, contrarians might want to keep a cautious eye on how these situations evolve.

Nick Perry ([e-mail])

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