If you cannot view the embedded media player, you can see the video here.
I joined Fox Business’ Varney & Company this morning to discuss the controversial decision by CVS Caremark (CVS) to stop selling cigarettes and other tobacco products in their pharmacy stores.
Given the competitive dynamics of the industry, it seems like a questionable decision. As I commented to Stuart Varney, every intersection in Dallas has either a CVS or a Walgreen’s (WGR) location—and it’s not uncommon to see rival CVS and Walgreen’s stores sitting side by side in the same shopping center. Dallas isn’t unique here; virtually every city in America is equally saturated.
It would seem like financial suicide for CVS to give tobacco-using customers—who still account for one out of every five Americans—a reason to choose their biggest rival, given that there is no material difference between the average CVS store and Walgreen’s store. For all intents and purposes, they are interchangeable to the average consumer.
CVS estimates that the decision will cost the company about $2 billion in sales, though I expect the real figure will be significantly higher. Smokers buy more than just cigarettes. As I joked in the video, they buy everything from low-cost items like Cokes and gummy bears to higher-priced items like branded prescriptions.
At any rate, CVS pulls in over $125 billion per year in revenues, so it’s hard to see the loss of tobacco being catastrophically bad for the company. But it does bring into question management’s commitment to act in the best interests of its shareholders.
Varney and I also chatted about General Motors (GM) and Microsoft (MSFT). I commented that, of all “household name” stocks, General Motors offered the best chance of delivering big returns in 2014. As I wrote earlier this year, General Motors is now free of government ownership, and there is a lot of pent-up demand for new cars after year of tepid sales. The average age of cars on American roads is now pushing twelve years. That’s not the lifespan of the car, mind you. It’s the car’s current age. And if the average is nearly 12, then half the cars on the road are significantly older than that. [Update: I may have spoken too soon in the video. GM released earnings on Thursday, and while revenues came in as expected, earnings missed. Overall, sales were strong in the United States and China, but weak virtually everywhere else.]
Finally, we discuss Microsoft’s new CEO, Satya Nadella, and agreed that he was a “safe” choice who will help the company make incremental changes, though he wasn’t the revolutionary we had hoped for. Nadella might prove us wrong, of course. But even if he doesn’t, Microsoft would seem to be an attractive stock at current prices, as the market appears to be pricing in no change to the status quo.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.