Dose of Domination
In this edition of the Smart Investor newsletter, we examine the stock of a major U.S. pharmaceutical distributor. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Market & Portfolio Update: On Monday, U.S. stocks suffered their worst day of 2025 as the trade war officially began. President Trump announced that 25% tariffs on all goods from Mexico and Canada – except Canadian energy, which will face a 10% levy – will take effect as planned on March 4th. Additionally, Trump raised tariffs on Chinese imports to 20%. In total, these measures affect approximately $1.5 trillion in annual imports to the U.S. The President also signaled more tariffs can be expected, including reciprocal tariffs on all U.S. trading partners and sector-specific levies on cars, semiconductors, and pharmaceuticals. Steel and aluminum tariffs are set to take effect in less than two weeks. Canada and China have retaliated with their own tariffs on U.S. exports.
Almost all stocks sank upon the news, but some industries were hit harder than others. Semiconductors faced extreme pressure, with Nvidia’s plunge exacerbating the sector’s decline due to company-specific issues beyond tariffs. Technology stocks, particularly chips and electronics, were among the worst performers due to their high exposure to supply chain disruptions and rising input costs. The sector is also deeply tied to China – both as a market and supplier – raising concerns over declining sales and escalating costs.
Meanwhile, broader economic growth concerns weighed on cyclical industries like Consumer Discretionary and Energy, which tend to decline during economic slowdowns. However, the Industrial sector fell less than the S&P 500, as its broad composition meant that some companies stood to lose from higher input costs and supply-chain disruptions, while others could benefit from protectionist policies or had the pricing power to pass costs onto customers.
While some domestic industries might gain from reduced competition, the overall market reaction signals deep concerns over the broader economic fallout of these tariffs, including the risk of further retaliatory measures. Given these developments, continued market volatility is likely, and a significant correction – or even a bear market – is possible if economic conditions continue to deteriorate.
The Smart Investor is a long-term, high-conviction portfolio of quality stocks. We adjust the Portfolio holdings according to our view of their earnings growth potential. While we take possible impacts of tariff developments into account, we don’t incorporate short-term market swings into our “buy” and “sell” decisions outside of price considerations. We will stick with this modus operandi, selling stocks only if we believe the effects may extend beyond a short-term impact. However, on the buy side, we believe that current conditions call for a preference for the more defensive side of the stock universe.
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❖ EMCOR Group (EME) reported strong fourth-quarter and full-year 2024 results, surpassing analyst estimates on earnings while slightly missing on revenue. The company issued upbeat guidance for fiscal 2025, with revenue and EPS projections above consensus expectations. Additionally, EMCOR expects continued strong demand across its key business segments, supporting its outlook for double-digit revenue growth in the coming year.
❖ Autodesk (ADSK) reported strong fiscal Q4 2025 and full-year results, surpassing analyst estimates across the board. The company issued an upbeat guidance for FQ1 and fiscal 2026, with revenue and EPS projections exceeding consensus expectations. Additionally, Autodesk announced it will lay off 9% of its workforce to streamline operations and redirect resources toward high-growth areas such as AI and cloud computing.
❖ Salesforce (CRM) reported mixed fiscal Q4 2025 and full-year results, with earnings surpassing but revenue slightly missing analyst estimates. The company issued a cautious guidance for fiscal 2026, with revenue projections below consensus expectations.
Data Cloud and AI ARR reached $900 million, reflecting strong adoption of AI-driven solutions. RPO grew 9% to $30.2 billion, signaling a solid backlog of contracted revenue. Agentforce, Salesforce’s new AI-driven automation tool, has already secured over 5,000 deals, highlighting early traction. For fiscal 2026, Salesforce projected revenue between $40.5 billion and $40.9 billion, below analysts’ expectations of $41.37 billion.
Following the report, Morgan Stanley maintained their “Buy” rating with a $405 price target, citing Agentforce’s growth potential. Wedbush reaffirmed a $425 target, while Bank of America lowered its price target to $400 from $440 but still sees Salesforce as a top GARP (“growth at a reasonable price”) play.
In addition, JPMorgan analysts have expressed a positive outlook on Salesforce’s recent performance, suggesting that investors should consider buying shares during the current pullback. They highlighted the acceleration in Salesforce’s Remaining Performance Obligation (RPO) growth, which increased from 10% in Q3 to 11% in Q4. Furthermore, Salesforce’s guidance for Q1 RPO growth exceeded Wall Street expectations, underscoring the company’s strong positioning despite a challenging macroeconomic environment.
❖ Interactive Brokers (IBKR) reported strong February 2025 performance metrics, including a 48% year-over-year increase in Daily Average Revenue Trades (DARTs) and a 32% growth in client accounts. Client equity reached $587.8 billion, marking a 31% increase year-over-year.
❖ Amazon (AMZN) is advancing its AI capabilities by developing a new “reasoning” model under its Nova brand, aiming to compete with industry leaders like OpenAI and Anthropic. This initiative is part of Amazon’s broader strategy to enhance its in-house AI offerings while maintaining a diverse model portfolio through its Bedrock AI platform. The Nova reasoning model is expected to be available by June 2025.
In other news, Amazon is expanding its budget-friendly marketplace, Haul, to better compete with Chinese e-commerce platform Temu, which has challenged Amazon’s dominance with ultra-low prices.
❖ According to media reports, Nvidia and Broadcom (AVGO) are testing Intel’s 18A process technology to assess its suitability for advanced semiconductor production. If Intel can prove its process is competitive, it could secure major manufacturing contracts, directly challenging Taiwan Semiconductor Manufacturing’s (TSM) dominance in high-performance chip production. This comes as U.S. semiconductor firms intensify efforts to diversify supply chains and enhance resilience amid escalating trade restrictions.
❖ However, challenging the world’s leading chip foundry is no easy feat, and TSMC (TSM) is taking aggressive steps to maintain its dominance. The company has confirmed plans to invest an additional $100 billion in the U.S., including six new chip fabrication plants and several advanced packaging facilities. This adds to its previously announced $65 billion U.S. investment, bringing TSMC’s total U.S. commitment to a staggering $165 billion. The move is part of a broader strategy to mitigate potential U.S. tariffs on semiconductor imports and solidify its foothold in the American market.
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Portfolio Stocks Under Review
❖ We are placing Salesforce (CRM) under review due to muted guidance, as discussed in the “Portfolio News and Updates” section above. Although analysts remain bullish on CRM, several have reduced price targets, raising concerns about the timeline for meaningful returns on its heavy AI investments. D.A. Davidson analysts argue that despite Agentforce’s early success, Salesforce’s AI focus is coming at the expense of its core business, which continues to decelerate. Since Agentforce isn’t expected to meaningfully contribute to revenue for at least a year, overall revenue growth may slow further in 2025. Amid elevated market volatility, this slower growth trajectory could weigh on the stock, despite its strong long-term potential.
❖ We are keeping ITT (ITT) under review despite strong Q4 2024 results and the following multiple analyst price-target upgrades. Our caution is primarily driven by President Trump’s recent announcement of a 25% tariff on all steel and aluminum imports, effective March 12th, 2025. As a manufacturer of engineered components and customized technology solutions, ITT relies on steel and aluminum as key raw materials. The imposed tariffs are expected to increase the costs of these materials, potentially impacting ITT’s production expenses and profit margins.
It’s important to note that the full impact of the tariffs will depend on various factors, including ITT’s ability to mitigate increased costs through supply chain adjustments, pricing strategies, or operational efficiencies. Additionally, potential retaliatory measures from trade partners and overall market conditions will play a role in shaping the company’s financial outlook. Therefore, ITT remains in focus until we gain a clearer picture of the policy developments and their impact on the company.
❖ RTX (RTX) remains under review despite a recent string of good news and strong analyst support. The pause in U.S. military aid to Ukraine could negatively impact RTX, a major defense contractor that produces Javelin and Stinger missiles, both supplied to Ukraine. The aid suspension may reduce demand for these systems, affecting RTX’s revenue from related contracts. Conversely, the recently increased U.S. military aid to Israel, including an expedited $4 billion package, is expected to benefit RTX. The company partners with Israel’s Rafael on key defense projects, including the Iron Dome and David’s Sling missile-defense systems, which could see increased procurement. We continue to monitor how these contrasting developments will impact RTX’s financial performance.
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Portfolio Earnings and Dividend Calendar
❖ Smart Portfolio companies continue to release their earnings results. Broadcom Inc. (AVGO) and Hewlett Packard Enterprise (HPE) are scheduled to release their results on March 6th, while Oracle (ORCL) is scheduled to report on March 10th, and Dick’s Sporting Goods (DKS) on March 11th.
❖ The ex-dividend date for ITT (ITT) is March 6th, while for GE Aerospace (GE) and Alphabet (GOOGL) it is March 10th.
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New Buy: McKesson (MCK)
McKesson Corporation distributes pharmaceuticals, medical supplies, and healthcare technology solutions, serving pharmacies, hospitals, and healthcare providers across North America and beyond. The company plays a critical role in the pharmaceutical supply chain, ensuring efficient delivery and access to medications while offering data-driven insights and automation tools for healthcare operations. McKesson focuses on specialty pharmaceuticals, oncology, and value-based care, supporting providers in improving patient outcomes. As healthcare systems evolve, the company leverages technology, logistics, and strategic partnerships to enhance supply chain efficiency, drug affordability, and overall healthcare accessibility in an increasingly complex regulatory and economic environment.
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Prescription for Growth
McKesson Corporation, founded in 1833, has grown into the largest pharmaceutical distributor in the U.S., playing a central role in the healthcare supply chain. Over the past five years, the company has strategically reshaped its business to strengthen its market leadership, expand its revenue base, and enhance operational efficiency.
A key move was the divestiture of its European operations, completed in 2022, when McKesson sold its regional businesses to Germany’s Phoenix Group. This allowed the company to streamline operations and focus on North America, where it holds the largest market share in pharmaceutical distribution.
McKesson has actively pursued M&A to strengthen its position in specialty pharmaceuticals and oncology, two of the fastest-growing segments in healthcare. In 2023, it acquired Rx Savings Solutions, a company specializing in prescription drug cost management, enhancing its ability to provide value-based care solutions. The same year, MCK expanded its presence in oncology with the purchase of Genospace, a precision medicine platform that integrates genomic data with clinical workflows, reinforcing its specialty drug distribution capabilities.
Strategic partnerships have also fueled McKesson’s growth, particularly in specialty care and technology-driven healthcare solutions. In 2024, McKesson deepened its collaboration with biotech and pharmaceutical manufacturers to expand its specialty drug portfolio, including exclusive distribution agreements for high-value therapies in oncology and immunology. It also strengthened its partnership with CVS Health, extending its pharmaceutical distribution agreement through 2029, ensuring a stable and growing revenue stream.
McKesson has invested heavily in automation and data-driven supply chain solutions, improving operational efficiency and reducing costs. It has expanded its use of AI and predictive analytics to optimize inventory management and drug distribution, addressing supply chain disruptions and increasing profitability. Additionally, McKesson has advanced its cold chain logistics to support the growing demand for temperature-sensitive biologics and cell and gene therapies.
These strategic initiatives have reinforced McKesson’s leadership in the U.S. pharmaceutical distribution market. By focusing on high-margin specialty pharmaceuticals and optimizing its logistics network, McKesson has driven consistent earnings growth, solidifying its position as the dominant player in the industry. Today, with a market cap exceeding $80.5 billion and annual revenues nearing $345 billion, MCK ranks #9 on the 2024 Fortune 500 list.
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Supply Chain Power Play
McKesson operates at the core of the pharmaceutical supply chain, distributing medications and medical supplies to pharmacies, hospitals, and healthcare providers across North America. Its business is primarily driven by its U.S. Pharmaceutical segment, which generates the vast majority of its revenue – roughly 97% – through contracts with major drug manufacturers and retail chains. Smaller but still significant are its Medical-Surgical Solutions division, which supplies clinics and surgery centers, its International segment (with a small Canadian presence following divestment from Europe), and its Prescription Technology Solutions business, which supports patient access and adherence to medications.
As part of an oligopoly alongside Cencora and Cardinal Health, McKesson commands a dominant position in the market. The three companies control over 90% of U.S. pharmaceutical distribution, with McKesson holding more than 25% of the market. The nature of this industry makes competition difficult. The scale required to negotiate pricing with drug manufacturers, navigate complex regulations, and maintain vast logistics networks is an insurmountable barrier for smaller players. Long-term contracts with major healthcare providers and pharmacies further insulate McKesson from disruption, keeping competitors at bay.
MCK continues to capitalize on the rising demand for pharmaceuticals, particularly in high-growth areas like specialty drugs and GLP-1 medications used for diabetes and weight loss. As more blockbuster therapies enter the market, including personalized treatments for cancer and autoimmune diseases, McKesson’s role in distributing these high-value drugs becomes even more critical. At the same time, an aging population and increasing rates of chronic illness continue to drive demand across the healthcare sector.
Beyond distribution, McKesson is expanding its reach through investments in technology and data-driven solutions that optimize supply chains and improve efficiency. The company’s ability to integrate automation, predictive analytics, and cold-chain logistics into its operations strengthens its competitive position while boosting profitability. By leveraging its scale, industry expertise, and strategic investments, McKesson is reinforcing its role as the backbone of pharmaceutical distribution, ensuring a steady pipeline of revenue growth in an industry that remains essential and ever-expanding.
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Immunity to Instability
McKesson Corporation has consistently demonstrated resilience amid economic fluctuations, trade tensions, and shifting healthcare policies. As the largest pharmaceutical distributor in the U.S., MCK is well-positioned to withstand challenges that might destabilize other sectors.
The demand for medications is largely inelastic – in other words, people need prescriptions regardless of economic conditions. This non-cyclical nature ensures steady revenue, even during downturns. McKesson also benefits from a stable financial foundation, with a significant portion of its revenue coming from Medicare, Medicaid, and private insurers.
The recent introduction of tariffs and President Trump’s promises of more to come – effectively launching a trade war – have raised concerns about supply chain disruptions. However, MCK’s strategic operations help mitigate these risks. Its CFO has stated that the impact of tariffs on Canada and Mexico is “fairly immaterial,” reinforcing the company’s robust logistics network. With the vast majority of its revenue derived from U.S. pharmaceutical distribution, McKesson is far less vulnerable to global trade instability than companies with greater international exposure.
McKesson remains one of the most defensive stocks in a trade war or recession. Its business is essential, demand is non-cyclical, and its scale provides strong pricing power. Unlike companies reliant on elective procedures or consumer spending, MCK will continue to see steady revenue growth regardless of broader economic conditions.
While the Trump administration’s proposed Medicaid cuts present a policy risk, MCK’s diversified portfolio and ability to adapt to regulatory shifts position it to navigate these changes effectively. Its scale, operational strength, and critical role in the healthcare system ensure its continued stability.
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Bottom Line Boost
McKesson has delivered impressive financial growth over the past three years, with revenue expanding at a 10.3% CAGR and adjusted EPS soaring at a 34.3% CAGR. The company’s scale, specialty drug distribution strength, disciplined cost management, and strategic execution continue to drive profitability.
In fiscal 2025, MCK continues this momentum. In its latest reported quarter (FQ3 2025), revenue surged 18% year-over-year to $95.3 billion, fueled by increased prescription volumes, strong specialty drug demand, and expanded oncology services. The U.S. Pharmaceutical segment led growth with a 19% YoY increase to $87.1 billion, while the Prescription Technology Solutions segment rose 14% due to higher prescription volumes in third-party logistics and technology services.
Profitability remained solid, with adjusted EPS rising 4% YoY to $8.03, driven by operational improvements and share repurchases, partially offset by a higher tax rate. McKesson raised its full-year adjusted EPS guidance to $32.55-32.95, signaling confidence in sustained earnings expansion. This translates to 19-20% adjusted EPS growth for fiscal 2025, underscoring MCK’s ability to drive higher-margin profitability.
A key catalyst is the resurgence of GLP-1 drug availability, with the FDA confirming that shortages of Ozempic and Wegovy have been resolved. This is expected to further fuel revenue growth, as GLP-1 drug sales were already up 47% YoY in the latest quarter. Additionally, McKesson is expanding into high-growth markets, signing an agreement to acquire an 80% controlling interest in PRISM Vision Holdings, reinforcing its presence in ophthalmology and retina care.
With specialty drug demand accelerating, supply chain efficiencies improving, and strategic acquisitions expanding its market reach, MCK remains well-positioned for continued growth, outperforming broader economic and healthcare industry headwinds. Analysts viewed McKesson’s results and outlook positively, citing strong revenue and operating profit growth, expansion in oncology and biopharma services, and vertical integration into specialty healthcare – immediately accretive to EPS.
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Prescription for Value
McKesson’s stock has delivered a 21% return over the past 12 months, outperforming both the S&P 500 and its industry peers. Despite this strong performance, MCK remains attractively valued. While it trades at moderately higher multiples than competitors, the premium is justified by its significantly superior past and projected earnings growth rates. Discounted cash flow models suggest MCK is undervalued by nearly 60%, presenting a compelling value opportunity.
Beyond stock price appreciation, MCK rewards shareholders through dividends, having paid distributions since 1995 and raised payouts annually for the past 11 years, with a CAGR of ~12%. While the current dividend yield stands at 0.41%, low payout ratios, strong financials, and a history of dividend growth through all economic cycles indicate room for further increases in the years ahead.
McKesson also returns capital aggressively through share buybacks, leveraging repurchase programs as a core part of its capital allocation strategy. In July 2024, the Board authorized an additional $4 billion, bringing the total buyback authorization to $9.9 billion. The company repurchased nearly $6 billion in FY 2024 and another $2.8 billion in the first three quarters of fiscal 2025, demonstrating a commitment to enhancing shareholder value.
Analysts rate MCK a “Strong Buy,” with an average price target implying a 7% upside. However, we align more with Robert W. Baird analysts, who see twice the upside potential. Ultimately, MCK’s greatest strength lies in its stability. Its low beta and defensive nature offer downside protection, making it a safe harbor in volatile market conditions while still delivering consistent long-term growth.
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Investing Takeaway
McKesson is the largest pharmaceutical distributor in the U.S., playing a critical role in the healthcare supply chain. Its leadership in specialty drugs, oncology, and biopharma services positions it for sustained growth as demand for complex therapies accelerates. The company continues to expand through strategic acquisitions, technology investments, and operational efficiencies, strengthening its competitive edge. Shareholder returns remain a priority, with consistent dividend growth and aggressive share repurchases. Despite strong stock performance, McKesson remains attractively valued, supported by resilient earnings and market dominance. Its defensive nature, steady cash flow, and pricing power make it a compelling investment in uncertain economic conditions. As healthcare needs evolve, McKesson’s scale, innovation, and financial discipline position it as a long-term winner in an essential industry.
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New Sell 1: Diamondback Energy (FANG)
Diamondback Energy, Inc. is an independent oil and natural gas company focused on exploration, development, and production in the Permian Basin, which spans Texas and New Mexico. The company primarily targets unconventional shale plays, utilizing horizontal drilling and hydraulic fracturing to maximize output.
Financially, Diamondback maintains strong fundamentals with low debt, ample liquidity, and high operational efficiency, making it more resilient to industry volatility than many of its peers. The company has consistently delivered strong revenue and earnings growth, with its latest quarterly results exceeding estimates. Additionally, Diamondback has raised its annual dividend, signaling confidence in its financial strength and commitment to shareholder returns.
However, despite Diamondback’s strong performance and potential, the broader Energy sector has come under pressure, significantly impacting FANG’s stock performance and outlook. The recent OPEC+ decision to increase oil production in April 2025, reversing prior delays, has weighed on crude prices. This supply increase, combined with rising production from the U.S. and Brazil, has led the EIA to forecast an oil market oversupply by Q2 2025, which is projected to persist until at least 2026.
At the same time, U.S. tariffs have intensified concerns about global economic growth, further pressuring crude prices. Investors have been wary of the economic impact of trade restrictions, and Monday’s tariff escalation by Trump has heightened uncertainty. As these tariffs take effect, they could slow economic activity and weaken energy demand, exacerbating pressure on oil prices.
While we view Diamondback as one of the best-positioned U.S. energy stocks, we believe the deteriorating sector outlook necessitates eliminating exposure. We plan to reassess this energy leader in the future once economic conditions stabilize, but for now, we see it as necessary to sell FANG.
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New Sell 2: Dell Technologies (DELL)
Dell Technologies is a leading provider of personal computers, servers, and enterprise IT solutions, with a strong presence in both consumer and commercial markets. While the company has been a major beneficiary of AI-driven data center demand, recent developments have raised significant concerns about its near-term prospects.
Dell’s latest earnings report painted a mixed picture, with revenue coming in below expectations while profitability showed some strength. The company’s PC segment continues to struggle, reflecting weaker global demand and intensified competition. Although AI-related server sales provided a boost, growth in this area has not been enough to fully offset PC weakness and macroeconomic headwinds.
Adding to the uncertainty, Dell is now facing scrutiny over a major controversy. Reports indicate that some of its latest servers, equipped with cutting-edge Nvidia AI chips, have been making their way to China, despite U.S. restrictions aimed at limiting Beijing’s access to advanced AI technology. The situation has triggered regulatory and geopolitical concerns, raising questions about potential repercussions for Dell’s business.
Meanwhile, tariffs pose another challenge. While Dell has a diversified manufacturing network, a significant portion of its supply chain remains exposed to China, Mexico, and other key trade partners now facing increased U.S. tariffs. The recently announced 20% tariff hike on Chinese imports threatens to inflate costs, while new 25% levies on Mexican and Canadian goods add further pressure. These trade barriers increase supply chain complexity, potentially disrupting component sourcing, production timelines, and overall margins, further complicating an already challenging environment for consumer electronics.
In response to these headwinds, several leading Wall Street analysts have reduced their price targets on Dell, reflecting concerns over earnings growth, regulatory risks, and broader market conditions. While Dell remains a key player in the IT industry, the combination of earnings volatility, geopolitical risk, and tariff pressures presents a challenging near-term outlook.
We will certainly revisit this hardware and infrastructure champion in the future, when we see clearer earnings momentum, the resolution of the regulatory overhang, and improved clarity on tariff-related cost impacts. Until then, however, we believe it is prudent to sell DELL.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The markets were a sea of red over the past week, but our Winners’ ranks have remained unchanged, still including 12 stocks: GE, AVGO, TPL, ANET, ORCL, HWM, TSM, EME, IBKR, PH, APH, and ITT.
The first contender is now IBM with a gain of 20.43% since purchase. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
