During the third quarter, we initiated five new holdings in the Fund, with the largest new purchase being CVS Health. CVS Health (NYSE:CVS) operates the largest pharmacy benefit manager (PBM) and retail pharmacy chain in the United States. Concerns about pricing pressures and potential competitive threats from Amazon have lowered CVS Health’s valuation to a 20-year low. However, we believe that CVS Health’s valuation—approximately 11 times forward earnings—does not reflect the strength of its franchise. The company holds the number one position in each of its five primary business lines: PBM; specialty pharmacy; retail/mail pharmacy; Medicare prescription drug plan; and, long-term care. In addition, over the past five years, CVS Health’s shareholder-friendly management team has improved return on invested capital, generated robust free cash flow, and gained significant market share. The company acquired Caremark (a PBM) in 2006 and successfully transitioned Caremark’s prescription script volume into CVS stores. CVS Health now plans to move into managed care with its pending acquisition of Aetna (the third-largest managed care company in the United States), which is expected to close by the end of 2018. On September 30, CVS Health shares constituted 1.0% of the Fund’s portfolio.
From Dodge & Cox's third quarter 2018 shareholder commentary.
