On Tuesday, May 21, 2024, Walgreens Boots Alliance, Inc. (NASDAQ:WBA) declined by 6.4% to close at $16.68. This is a low not seen in nearly 25 years. WBA stock re-tested prices last seen in 1998 on no major news. Short-sellers potentially took advantage of the stock trading ex-dividend on that day. However, the short float is too small. The size of the dividend at $0.25 a share is small compared to the stock price falling by $1.14 on the day.
Investors are instinctively asking why selling momentum accelerated for Walgreens. I provided a general comment that applies to WBA stock:
When WBA is down on the news, and you do not know why, do not buy.
Someone knows something you do not. Rating: Continue to avoid WBA stock.
Walgreens deserves a more in-depth review beyond that generalization. When the Dow Jones (DJI), S&P 500 (SP500), and Nasdaq (COMP:IND) are at all-time highs, markets are more willing to bid winners higher and punish troubled companies. This stretches the valuations of growth firms and offers a steep discount on companies like Walgreens.
There are five reasons, theories, and similarities other firms faced that might explain why Walgreens fell sharply in a single day.
1/ Short Interest
The market reserved a dangerous short squeeze on stocks having excessive short interest. ZIM Integrated Shipping (ZIM), GameStop (GME), AMC Entertainment (AMC), and AST SpaceMobile (ASTS) are examples of stocks breaking out. Conversely, the short interest in Walgreens is not particularly newsworthy. The short float increased by around 5 million shares between 3/28/2024 and 4/30/2024. The days to cover increased from 3.05 days to 5.04 days:
In mid-Dec. 2023, short interest was 42.7 million shares, higher than the last reported value. However, the days to cover were 2.48. Bears may have timed the short sale yesterday just as Walgreens traded ex-dividend.
Income investors may recall companies like BCE (BCE), Verizon Communications (VZ), Altria (MO), or AT&T (T) falling sharply after they traded ex-dividend. In this case, bearish investors are potentially speculating that Walgreens will slash its next dividend.
2/ Lingering Headwinds From Former Walgreens CEO
On September 1, 2023, news circulated that Walgreens announced that Rosalind Brewer decided to step down from her leadership and board membership positions. That news attracted 302 comments:
Before that, in 2021, Harvard Business Review reported the then-CEO’s views on the importance of inclusion and equity, along with employee empowerment. Investors may compare Walgreens’s cash flow performance since Brewer’s appointment in March 2021.
Goodwill and intangibles increased, stock-based compensation nearly tripled to $391.0 million by fiscal 2021, and cash flow from operations declined.
Walgreens’s weak share performance does not give CEO Tim Wentworth a vote of confidence. Wentworth joined in October 2023. He worked as the founding CEO of Evernorth, Cigna’s (CI) health services organization. From May 2016 to Dec. 2021, he served as CEO of Express Scripts. Cigna bought Express Scripts for $67 billion in Dec. 2018.
Experienced investors may compare Walgreens to Teva Pharmaceutical (TEVA). When it hired CEO Kare Schultz, it was not until after CEO Richard Francis replaced him that TEVA stock broke out to multi-year highs. In effect, Schultz’s restructuring efforts did not pay off for investors until April 2024. In Q1 2024, Teva posted strong quarterly results and issued a positive business outlook.
For General Electric (GE), leadership under Lawrence Culp, Jr. did not pay off immediately. Culp joined as CEO in October 2018. In June 2022, the company appointed him CEO of GE Aerospace.
GE stock languished up until last Oct. 2022. It enjoyed a relentless uptrend after that, rising from around $35 to $161.00 as of May 21, 2024.
3/ Walgreens on a “Do Not Buy” List
As I wrote in my comment in the introduction of this article, Walgreens is on the do not buy (“DNB”) list. The stock’s bearish downtrend is similar to deep-value stocks that markets are avoiding. This includes Newell Brands (NWL), which slashed its dividend by 70% to $0.07 last May 2023.
Automotive tire supplier Goodyear Tire & Rubber (GT) is on my DNB list. The firm has new leadership yet reported revenue falling by 8.1% Y/Y to $4.54 billion. The EPS of $0.10 is not enough to lead to a dividend increase.
Value investors may view Walgreens as a value trap. It trades at a price-to-earnings ratio (non-GAAP) that is 71.97% below that of the sector. Its EV/Sales, for both TTM and forward (“fwd”), are also at nearly 80% below that of the sector average:
Just as Rite Aid traded at a steep discount, Walgreens is also discounted. Markets are bearish on its retail drug store business amid rising shrinkage (including theft). Its pharmacy operations accounted for around $110 billion in retail sales. The bad news is that the stock’s profitability grades score a “D.”
4/ CVS Health Sold Off
Arguably the better pharmacy chain operator and health plan provider, CVS Health (CVS) shares fell sharply after posting weak results in its health care benefits unit. Adjusted operating income fell by nearly 60% Y/Y to $732 million. It cut its 2024 full-year guidance to GAAP diluted EPS from $7.06 to $5.64.
Markets potentially delayed their selling of WBA stock in response to CVS’s weak results. Last month, CVS’s management did not warn the investment community before issuing the poor results. Markets are fearful that Walgreens will do the same.
Analysts rated CVS a buy. The stock has better valuation and profitability, and yet still fell sharply.
In the scorecard above, Cigna has notably strong ratings and quant rankings. It has a stronger sector rank compared to both CVS and Walgreens. In addition, it has strong factor grades in all metrics except valuation.
Readers may consider Humana (HUM), and Centene (CNC) in managed health care while comparing it to Walgreens. Centene is the better pick since Humana is down by 22.3% this year.
5/ Fierce Competition in Retail Pharmacy
Readers who followed my coverage on inflation (filter my articles by SP500) will recall that persistent inflation is hurting the consumer’s disposable income. This hurt retail firms like Dollar Tree (DLTR) and Dollar General (DG).
Walgreens is potentially facing escalating competition in the retail sector. Online e-commerce giants like Amazon (AMZN) are taking market share. Walmart (WMT) may not yet lead, based on prescription revenue. However, shares gained $5.00 after Walmart posted strong Q1/2025 results.
Walmart said that sales grew by 5.7% and by 12.9% in constant currency. Its market share gains in general merchandise are not inflation-driven results. More worryingly for Walgreens is that Walmart built its pharmacy business. It found ways to drive business for its pharmacists. For example, it boosted immunizations and vaccinations.
Your Takeaway
Investors may seek an infinite number of reasons why Walgreens fell sharply in a day. Any one of them is potentially correct. What matters is its stock price. When it falls, investors are losing money.
Zoom out of the chart, beyond weekly, and on a monthly chart. The stock is on a downtrend that began 10 years ago when the stock price peaked at nearly $100.
Zooming in on the daily chart, Walgreens failed to break out above its moving averages. These are resistance levels. To trade above that, the company’s CEO needs to communicate a feasible turnaround plan. The market will look at data like cash flow and sales levels next. That would measure the progress of its business transformation.
