The holiday break is coming to an end, and it soon will be time to get back to work. That’s true for investors as well. 2017 was a great year for the markets. But with those markets near all-time highs, and volatility at its lowest levels in a decade, investors might have to work a bit harder.
They can start next week. Earnings season won’t kick into high gear for another couple of weeks, but there are a few key releases right out of the gate. Reports are coming from two companies involved in one of last year’s biggest, and most controversial, deals. Also, a high-flying consumer stalwart will look to keep a five-year bull run intact.
These reports won’t necessarily set the tone for 2018 — but they could show whether investors become a bit more cautious once the calendar turns. At the least, they could provide some fireworks to start the year.
Earnings Reports to Watch: Rite Aid (RAD)
It’s possible no one is more looking forward to the end of 2017 than Rite Aid Corporation (NYSE:RAD) shareholders. At the beginning of the year, Rite Aid seemed set to be acquired by Walgreens Boots Alliance Inc (NASDAQ:WBA) for $9 per share. By November, even with a re-worked, if smaller, deal, RAD stock traded below $2.
An end-of-year rally has set up a hugely important fiscal-third-quarter report for Rite Aid on Wednesday afternoon. Lost somewhat in the M&A drama was the fact that Rite Aid posted an abysmal performance in the first half of its fiscal 2018. Same-store sales declined 3.7%, including a nearly 5% drop in comparable pharmacy revenue. Adjusted EBITDA fell 32% year-over-year.
With the Walgreens deal behind it, Rite Aid simply needs to stem the bleeding. Even with nearly $4 billion in proceeds from Walgreens, Rite Aid’s debt could again become an issue if profits continue to plummet. The Street clearly isn’t interested in the Rite Aid story, with the average target price barely above $2.
Both in the Q3 release and on the Q3 conference call, Rite Aid management has the chance to change the narrative. But given four straight quarters of declining comps, investors would be wise to see that proof before taking a flyer on RAD.
Earnings Reports to Watch: Walgreens (WBA)
For Rite Aid’s would-be suitor, 2017 wasn’t all that great either. WBA stock has declined about 13%, and touched a three-year low in late October.
But Walgreens has a much better shot at improvement in 2018, and a solid fiscal Q1 report on Thursday morning could jump-start a rally. The fears that Amazon.com, Inc. (NASDAQ:AMZN) would enter the pharmacy space are lessening. Rival CVS Health Corp (NYSE:CVS) will have its hands full for much of 2018 dealing with its own M&A drama.
And WBA management will have a lot to offer analysts on the post-earnings conference call. Walgreens is rebranding its own stores, and adding 1,300 locations through the Rite Aid deal (600 of the acquired ~1,900 are being closed). The company took a 40% stake in Chinese chain GuoDa as well.
With WBA stock looking cheap, and management having a story to sell, Walgreens looks set up for a post-earnings rally — as long as the numbers cooperate. And with holiday retail spending looking strong, a consensus beat looks likely as well. WBA already has rallied 14% from those October lows, but I expect that rally to continue next week.
Earnings Reports to Watch: Constellation Brands (STZ)
If history is any guide, traders at the least should buy Constellation Brands, Inc (NYSE:STZ, NYSE:STZ-B) ahead of its fiscal-third-quarter earnings report on Friday morning. It seems that all Constellation Brands has done for years now is “beat and raise” quarter after quarter. That’s one major reason why the stock is up a whopping 550% over the past five years.
The company’s diversified portfolio of alcoholic beverages — among them Corona beer, Robert Mondavi wine and Black Velvet whiskey — should keep the party going in Q3. But from an investment standpoint, STZ is looking a bit stretched. The stock trades at over 24x fiscal 2019 consensus EPS estimates. The average Street target price suggests just 5% upside.
Admittedly, there’s little reason to bet against Constellation Brands at this point. But some caution is advised. More broadly, the reaction to the Constellation report will give a hint as to the market’s mindset in the New Year. If STZ posts another beat, and the stock sells off, it may mean that momentum stocks don’t have quite the momentum they’ve had for the last year-plus. That might be a sign that investors may need to tread a bit more carefully in 2018 than they did in 2017.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.