The markets had a really good 2017. The S&P 500 rallied 20% higher, the Dow Jones shot 25% higher and the Nasdaq-100 posted gains north of 30%. But that doesn’t mean every stock had a good 2017. Take Walgreens Boots Alliance Inc (NASDAQ:WBA) for example, WBA stock dropped about 10% last year.
Most of that decline came in the back-half of 2017, as investors sold on fears that internet giant Amazon.com, Inc. (NASDAQ:AMZN) would lunge into the pharmacy world and eat WBA’s lunch. By October 2017, WBA stock fell to its lowest levels since late 2014.
WBA stock has rebounded sharply from those lows to around $75. But Walgreens stock is still well below the $80 to $90 levels it hovered at for most of 2015, 2016, and 2017.
Can Walgreen’s get back to those levels? I think so.
The narrative surrounding WBA and other pharmacy retailers grew unnecessarily dour in late 2017 as investors freaked out that Amazon would not only enter the pharmacy world, but also eat WBA’s lunch in the process.
Those concerns don’t make much sense.
Firstly, barring an acquisition of Rite Aid Corporation (NYSE:RAD), it doesn’t look like Amazon will become a formidable competitor to Walgreens in the pharma world any time soon.
Amazon appears to have canceled a pharmaceutical wholesaler application in the state of Maine, a sign that the internet giant may be having second thoughts about entering the multi-billion dollar pharma market.
Secondly, even if Amazon does plunge into the pharma world, that doesn’t necessarily imply the death of WBA. Amazon will certainly eat market share, like the company has done in the retail and grocery markets. But Amazon won’t kill WBA’s business.
Macy’s Inc (NYSE:M), Nordstrom Inc.(NYSE:JWN), Kohl’s Corporation (NYSE:KSS), Kroger Co (NYSE:KR), and Sprouts Farmers Market Inc (NASDAQ:SFM) are all still around (and they’ve been bouncing recently as investors realize that Amazon isn’t the only retailer out there).
Overall, concerns related to an Amazon takeover of the pharma world appear greatly overdone.
While investors are freaking out about Amazon, Walgreens management is successfully positioning the company for success in a multi-year window.
Walgreens is pouring money into store renovations. That is huge, because in the pharma world where product offerings are largely commoditized from chain to chain, in-store aesthetic can be the differentiating factor which wins customers over.
Walgreens is also placing an emphasis on enhancing its beauty offering. Again, this is huge, because we are in the era of the selfie where the most used apps are Instagram and Snapchat (the picture ones).
In this era, how you look is of utmost importance, and beauty products are the tools people use to look their best.
That is why cosmetics retailers like Ulta Beauty Inc (NASDAQ:ULTA) and Sephora have been on fire lately. ULTA has consistently reported comparable sales growth north of 10%, while Sephora continues to be a strong segment for J C Penney Company Inc (NYSE:JCP).
With an enhanced beauty offering and more in-store beauty specialists, WBA is thrusting itself more deeply into this high-growth cosmetics space. And so long as Instagram and Snapchat continue to grow in popularity (the IG user base continues to grow at an absurd rate, while Snapchat was the second most downloaded app last year), the cosmetics space will continue to be a high-growth market.
And WBA sales will trend higher.
Store renovations and an enhanced beauty offering should provide strong operational tailwinds for Walgreens over the next several quarters.
Meanwhile, WBA stock is trading a noticeable discount to its trailing five-year average valuation. Plus, the 20-day exponential moving average on WBA stock just crossed above the 50-day exponential moving average, a golden cross pattern usually indicative of a stock in breakout mode.
Overall, a strong growth narrative, a discounted valuation, and breakout technicals all come together to imply that WBA stock could be positioend for a big rebound in 2018.
As of this writing, Luke Lango was long WBA, ULTA, RAD, M, KR, and AMZN.