​​This ‘Liquor Store’ is the Next Great COVID-19 Trade

By: Keith Kaplan

Aug 17, 2021 | EducationalInvesting Strategies

In 2016, a company you don’t associate with alcohol generated $1 billion in booze sales.

The sales stretched across 8,200 stores and hit that 10-figure mark on just 235 unique alcohol products.

You might speculate that this juggernaut for alcohol sales would be a grocery store chain like Kroger Co. (KR) or even a gas station operator like Valero (VLO).

And both would be great guesses. But this company — raking in more than $1 billion five years ago on alcohol sales — is one of America’s most important “health” companies.

I’m talking about Walgreens Boots Alliance, the second-largest drugstore chain in the United States.

Why am I pointing this out?

Because this random fact drew my attention to a real buying opportunity.

Let’s dig in.

Walgreens Looks Like a Great Play

Walgreens’ stock has been under pressure over the last few months due to ongoing concerns about Amazon’s potential expansion into the pharmaceutical space.

While Washington is cracking down on Amazon for its competitive practices, one should think a bit more about the popularity of mail-order medications. Simply put: Americans prefer to see their pharmacists.

A February survey by Public Policy Polling shows that Americans don’t want to substitute their health care and access to drugs for personal convenience.

The survey of 1,390 adults found that 85% preferred to receive their prescriptions from a local pharmacist instead of mail-in orders. This is an overwhelming sentiment. In addition, respondents said their pharmacists are better at answering questions, know them better, and don’t offer the threat of medications getting lost in the mail.

For now, the Amazon threat seems overblown.

So, let’s dig deeper into the opportunity here.

A Dividend King of Kings

When a stock has a pullback like Walgreens has in recent months, I think it’s essential to look at one crucial measurement: How does the company manage its cash flow?

To answer this question, would-be investors should examine the company’s history of dividend growth. The ability to generate cash flow and return it to investors is a critical measurement of stock and executive performance.

And Walgreens is great at it. The company has hiked its dividend for 46 straight years. On July 14, the company again increased its annual payout from $1.87 to $1.91.

Despite the threat of online competition, it has shown an ability to generate large amounts of income over the previous years.

Of course, Walgreens’ impressive alcohol sales are an extension of its success. But remember that its successful pharmacy operations will remain the leader of its business strategy in the future.

Risk Versus Reward

The company does have a few risks outside of potential competition from Amazon.

Walgreens has a rather large debt load, and it faces challenges in expanding into new business lines. However, at its core, it will remain a pharmacy chain that is always trying to make up ground on its largest competitor: CVS Health (CVS).

Yet CVS faces the same pressures: Amazon, debt, and challenges to the business model. Despite these factors, CVS stock is up 20% over the last six months.

Walgreens, however, has been effectively flat over that period. Moreover, when digging into the numbers, I found that Walgreens’ profit margins could increase in the future.

Over the last 20 years, Walgreens’ profit margins have averaged north of 3.3%. This year, net margins are at 1.51%.

If the company can get back to those levels, it would be positive for the company’s cash flow and its ability to keep raising its dividend. It might take a bit of time, but patience could pay off on a stock that looks a bit undervalued.

The Next Catalyst

One of the most important catalysts for Walgreens moving forward is the big announcement from this past weekend. Dr. Scott Gottlieb, a former FDA commissioner, said that COVID-19 would no longer be a “pandemic” in the wake of the delta variant’s surge.

He said that it would become an “endemic” for the United States. This means that the virus will remain confined to smaller swaths of the country — and potentially experience mutations and small surges on a seasonal basis. This matters because it changes the future of COVID-19 vaccine deployments.

Since the rollout of the Moderna, Pfizer, and Johnson & Johnson vaccines, CVS and Walgreens have been on the front lines.

The FDA’s recent approval of booster shots for individuals with autoimmune deficiencies looks like the first step in another round of vaccinations heading into the fall. In the wake of delta, vaccinated Americans will likely require another dose as well.

And as some parts of the country play catch-up on their first rounds of vaccinations, the traffic into CVS and Walgreens could surge.

Wall Street has been increasingly bullish on Walgreens Boots Alliance (WBA) stock over the last month. As a result, the stock currently has an average price target of $55 among 10 analysts. 

As always, we’re paying close attention to what TradeSmith Finance tells us about the company. Six days ago, WBA pushed back into the Green Zone, signaling that it is a Buy. 

It is also sitting in positive momentum conditions. The 20-day moving average looks like it is getting ready to cross back over the 50-day moving average, which would be a positive technical shift for the stock.

We’re always looking for buying opportunities on the dip, especially when a stock has positive momentum. Walgreens appears to have found solid support as a potential rebound play in the months ahead.

I’ll be back on Wednesday to talk about another stock that remains on our radar.

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