From Stansberry Research:
To be a successful company in today's economy, you need to be big...
And you need to get big, fast.
Unlike the conglomerates that bought up unrelated businesses in the 1980s to create phantom "synergies"... today, bigger is actually better.
The more products and services a company provides, the more visibility it gets from consumers, search engines, and retail stores – which makes it easier to provide even more... And increased volume increases profits.
By offering a variety of products, companies can keep customers in their "ecosystems." Just look at the model Apple (AAPL) uses with its iPhone and App Store...
From Apple Maps to Apple Music and now Apple Pay, there are nearly endless possibilities to what you can accomplish... And there's no need for apps from other companies or developers. This gives Apple more ways to generate profits.
It's not just about a customer ecosystem, either. It's about data...
Data are just as important as profits. Companies can collect data from users in order to make their ecosystems better. By building better ecosystems, the companies can get more users, and therefore, more sales and profits.
Many "Global Elite" businesses – like tech giants Apple and Tencent (TCEHY) – use this strategy to help dominate their markets.
They're often the largest companies in their sectors. You can go almost anywhere in the world and find their products or services. They have great balance sheets, thick margins, and they look after shareholders with dividends and buybacks.
This week's company is building one of the best ecosystems in health care...
CVS Health (NYSE: CVS) used to be just a pharmacy and drugstore chain. Customers could go there to get their prescriptions filled, and maybe buy some tissues or a pack of gum.
But CVS has grown into so much more...
The company is spreading across the health care system, aiming to be a one-stop shop for providing health care.
In recent years, the company has expanded its footprint aggressively. In 2000, it had about 4,000 locations. Today, it has nearly 10,000... And around 70% of Americans live within three miles of a CVS store.
Many of those locations contain a CVS MinuteClinic. Launched nearly 20 years ago, these sections of the store provide a nurse practitioner or physician's assistant to deliver basic tests and write some prescriptions. This was the company's first move to deliver more than standard pharmacy services.
Then in 2007, CVS bought the pharmacy benefits manager ("PBM") Caremark in a huge $21 billion deal. PBMs act like middlemen between drugmakers and insurance companies, negotiating lower prices and handling reimbursements.
For CVS, this drastically changed the nature and size of the business. Now, it wasn't just counting and bottling pills. This gave it big ties to insurance and a major say in how the pharmaceutical industry worked.
In 2015, CVS expanded its reach even more by buying all the pharmacy locations inside more than 1,600 Target (TGT) stores.
Earlier this year, CVS closed a $69 billion buyout of health-insurance company Aetna. When the deal was announced, the Wall Street Journal called it "the latest and most dramatic sign of how the lines between traditional segments in health care are blurring."
The deal gives CVS access to each part of the health care "chain" – a process called "vertical integration." This is a huge boost for the business.
By controlling the whole chain – from insurance company to PBM to distributor, along with its health-clinic offerings – CVS argues it can better control costs and seamlessly provide the services that patients want.
It makes sense. Your insurance company loves when you go to something like the MinuteClinic rather than the emergency room when you have an earache. A giant like CVS can drive a hard bargain when pushing back on drug prices from pharma companies.
With all these services vertically integrated, CVS can undercut others on price because it earns profits at more levels.
To further promote its move into all aspects of health care, CVS began testing its "HealthHUB" stores last year. HealthHUB stores dedicate more than 20% of their floor space to health care services. At these stores, customers can see a nurse practitioner, get screened for diabetes, or even take a sleep apnea assessment.
But diagnosis isn't the only focus of HealthHUBs. Customers can also take yoga classes or sign up for teeth-alignment service Smile Direct Club. The test was so successful that CVS just announced its plan to open 1,500 HealthHUBs across the U.S. by 2021.
It's yet another way CVS is trying to get customers to stay under its umbrella of services.
Plus, by keeping customers within its health care ecosystem, the company knows it can make a little profit from your insurance plan, a little from the PBM, and a little when you go to the store.
It's a grand plan. It could make CVS a one-stop shop for all your health care needs, giving it a huge advantage over the competition.
And it's one of the reasons we consider CVS to be a "Global Elite" business you should own.
Recently, investors have grown skeptical of how CVS will integrate Aetna into its business. In February, CVS issued disappointing full-year earnings guidance. This led investors to fear that it would take longer for CVS to see the benefits of the deal. As a result, the stock has fallen about 35% from its November high.
When great companies like CVS decline by 20%, we become interested. When they drop by 25% or more, they really grab our attention.
The window may be closing to buy into CVS before these fears subside. At its investor day last week, CVS provided better-than-expected long-term guidance. This could signal that the Aetna deal will be more beneficial than previously thought.
As investors digest this news, this "Global Elite" business won't be on sale for long...
Sometimes investing is simple.