When it comes to CVS Health (NYSE:CVS), there’s no shortage of reasons to steer clear of CVS stock. Pharmacies are getting hammered by lower reimbursement rates and higher costs. Health insurers — recall that CVS acquired Aetna last year — are struggling. CVS Health stock is down 16.3% this year.

But wait, there’s more: That Aetna deal may be reversed. Amazon.com (NASDAQ:AMZN) looms, fueled by its PillPack acquisition and its Haven health care joint venture, with partners JPMorgan (NYSE:JPM) and Berkshire Hathaway (NYSE:BRK.B).

Those risks have led to an ugly chart for CVS Health stock. In March, CVS stock touched its lowest level in almost six years. Since then, the shares have traded mostly sideways, returning to those lows several times before a recent, modest, bounce.

But at the lows, CVS becomes an interesting contrarian pick. CVS stock is cheap – – and close to absurdly so. Some of the headwinds facing the company should reverse at some point. The legal uncertainty surrounding Aetna doesn’t necessarily seem like bad news. And the threat of Amazon may be overblown, as it so often has been.

That’s not to say those risks aren’t real. And with a huge debt load post-Aetna, CVS stock absolutely can fall further. Still, with support seemingly intact and the valuation pricing in those concerns, the risk-reward surrounding CVS Health stock looks attractive.

CVS Health Stock Tanks … And So Do Peers

Perhaps the biggest change surrounding CVS stock of late is that the pharmacy business model has moved from being perceived as a strength to seen as a weakness. Pharmacies long were considered defensive stocks; even in an economic downturn, consumers still needed their prescriptions. Indeed, CVS earnings rose over 12% in 2009 — at the same time the U.S. was dealing with the worst of the Great Recession. (To be sure, CVS stock still tanked as investors sold pretty much every U.S. equity.)

It’s not just CVS that’s struggling. Shares of Walgreens (NASDAQ:WBA), too, touched a nearly six-year low in late May. Rite Aid (NYSE:RAD) stock has collapsed to the point that a reverse split was required.

Three key factors are behind the industry’s troubles.

One, pharmacies are receiving lower reimbursement rates from insurers. As efforts to rein in costs cascade through the health care system, pharmacies are taking the brunt.

Another factor is that generic drugs aren’t coming as quickly as they have in the past — and they aren’t as cheap as they used to be. Without steady savings from generics to offset lower rates, margins in the pharmacy business have crumbled.

Adjusted operating income in CVS’ retail/long-term care (LTC) segment declined 19% in the first quarter. While the LTC business struggled, the pharmacy business was a big driver. Walgreens highlighted similar pressures in its recent fiscal third quarter report.

And, finally, front-end sales remain weak. For CVS, front-end sales declined 2.6% in 2017 and 1.5% in 2016. A 0.5% increase in 2018 still suggests negative growth over the three-year period. Whether that weakness is coming from e-commerce competition, improved convenience stores from fuel sellers like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), or other factors, isn’t entirely clear yet. But here, too, Rite Aid and Walgreens are seeing similar trends.

Amazon and Pillpack

Essentially, the pharmacy business looks tough right now. And it may get tougher. Amazon long has been considered a potential entrant in the pharmacy space. That speculation only intensified after the e-commerce giant acquired PillPack last year.

As Luke Lango detailed in February, Amazon appears to be a real threat to CVS Health — and to CVS Health stock. And that’s not just a matter of displacing in-store prescription sales through a mail-order model.

Rather, it appears increasingly likely that Amazon is considering disrupting the pharmacy benefit manager (PBM) model. CVS is one of the three titans in PBM, through the Caremark business that it acquired back in 2007. Cigna (NYSE:CI) recently acquired Express Scripts, another big player, while UnitedHealth Group (NYSE:UNH) has substantial share through its OptumRx unit.

As Barron’s noted, about 70% of earnings, even after the Aetna deal, come from the retail pharmacy and the Caremark PBM. Investors fear those profits are at significant risk. With health insurers not exactly setting the world on fire — a basket of the largest health insurance stocks would be roughly flat over the last year — it’s not hard to see why CVS is trading at such paltry earnings multiples.

Is The Aetna Deal At Risk?

With all those risks, the last thing shareholders needed was another one. But now it appears the already-closed Aetna deal might be at risk.

As InvestorPlace contributor Dana Blankenhorn detailed last month, a federal judge is reviewing the merger, and in theory could force the two companies to separate. Case law here is murky, and the odds that the court actually reverses an already-closed deal seem slim. But it is a possibility — and one that could be close to disastrous for CVS Health.

After all, it’s not entirely clear how such a separation could even work. What happens to the $48 billion in cash that CVS paid to Aetna shareholders? Will they send bills? Would Aetna stock be re-listed? The practical considerations alone would seem to dissuade Judge Richard Leon from actually separating the two companies, were he so inclined.

Still, the risk is out there. And as one of many, investors have responded accordingly. But assuming a somewhat orderly split, even a reversal of the merger might not be bad news for CVS stock. Investors didn’t really like the deal to begin with: CVS stock now is down by about 30% since it was announced. Would a reversal be greeted by more selling — or a relief rally?

The Case for CVS Health Stock

Again, these worries can’t be ignored. But there’s also an appealing contrarian case for CVS Health stock.

First, CVS stock is cheap. Ridiculously cheap as 2019 EPS guidance of $6.75-$6.90 was reaffirmed at the company’s Investor Day last month. Even the low end of the range suggests CVS trades at 8.2x earnings.

Meanwhile, at the same event, CVS guided for steady growth going forward: $7+ in 2020 EPS, followed by mid-single-digit growth in 2021 and 10%+ increases afterward. CVS could target EPS nearing $10 per share by 2024; assuming even a still-soft 12x multiple, the stock would more than double in five years even before a current 3.6% dividend yield.

Debt funding the Aetna deal (for now) does help that multiple. But even on an EV/EBITDA basis, which includes the company’s borrowings, a 7x+ multiple is the company’s lowest in years. By any measure, CVS is priced for earnings declines – while management insists that growth is ahead.

And management could be right. CVS is moving toward a diversified health care offering, between insurance, a PBM, and in-store care through its HealthHUBs. Reimbursement rate pressures may ease at some point. Front-end sales already are being de-emphasized, as the HealthHUBs replace space currently allocated to slower sellers.

Contrarian investing always is tricky — particularly when a company has the debt and the headwinds that CVS has. A stock like that never truly gets “too cheap”. But CVS is cheap and management believes it will be a beneficiary of the transformation of U.S. health care. If management is even close to right, CVS stock will rally at some point.

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