I've Got a Prescription That Will Give Your Portfolio a Shot in the Arm

Drugstore giant Walgreens Boots Alliance had a horrible 2020 as judged by its share price action. The stock declined by more than 32% while the Dow rose 7.25% and the S&P 500 gained 16.26%. Continuous shareholders and fund managers who held it were not happy campers. WBA finally bottomed on Sept. 24 at $32.36. It hadn't changed hands at that low an absolute price since around mid-2012. It's no wonder then, that WBA is out-of-favor. Since bottoming, though, WBA quietly moved up by 23.2% by year-end 2020. Walgreens doesn't deserve disrespect based on its long-term record. Fiscal 2020 (ended Aug. 31, 2020) did show a Covid-related earnings per share decline of 20.9%, from $5.99 to $4.74. That shouldn't have surprised anyone with months of hard lockdowns holding back both store traffic and doctors' visits for anything but Covid. Even after taking last year's depressed results into account, WBA showed fine 10-year growth across all major business metrics. Its shares, however, closed 2020 barely higher than they sat exactly a decade earlier. WBA's 10-year total return represented just a fraction of the increased embedded value created. That was due to a hefty dose of price-to-earnings compression. WBA closed out 2010 at 18-times trailing earnings. It finished last week at just 8.4-times fiscal 2020's profit tally. Discrepancies like that are almost always resolved via catch-up moves higher which arbitrage away the difference between price and value. Walgreens Boots Alliance has a solid balance sheet, plus high marks for both stock price stability and earnings predictability. From 2010 through 2020, WBA averaged about 15.9-times earnings accompanied by around 2.20% in current yield. As of Friday, those figures were 7.6-times Value Line's fiscal 2021 estimate for WBA along with a generous, but well covered, 4.7% yield. Even a partial reversion toward the mean valuation supports an end of next summer target price north of $73. That implies at least 84%, plus dividends, of potential upside within months, not years. That goal is not far-fetched. WBA peaked between $78 and $102 during each of the five years stretching from 2014 through 2018. Only one of those years saw EPS as high as this year's estimate. None had dividends as high as they are today. Traders were willing to pay up to 22-times to 25-times earnings to own WBA during 2015 to 2016. I'm very bullish on prospects for Walgreens' future profit rebound. WBA and CVS will be administering millions of doses of the Covid vaccines this year. They'll be paid for those injections plus, patients waiting to be seen in the stores will likely be browsing and buying front of the store items while they wait. Fiscal 2020 saw WBA's worst net profit margins in more than a decade. The firm's 10-year average net profit margin was 3.75%. The four immediately pre-Covid years (2016 - 2019) averaged 4.4%. Simply getting back to a still-below-normal 3.5% net margin could send EPS to $6.15 or so in the current year. I'm betting that analysts will be ramping up their estimates as the year progresses. If earnings per share begin looking higher, WBA's P/E should start expanding. At a $6 estimate and 15 multiple, the goal price advances to $90. Reaching that manageable level would deliver a greater than 125% gain. If it takes two full years to accomplish, that goal would still equate to about 67% in annualized total return. Despite its bum rap from almost all analysts, Walgreens now offers a blue chip, $140 billion plus annual revenues company at a single digit multiple along with a nearly 5% income stream. After moving up nicely since late September, WBA shares now even have a touch of momentum going for them. Walgreens absolute low price and nearly cheapest-ever valuation suggest huge upside awaits. Still not ready to pounce? No cash available to buy with? Consider selling some WBA puts out to Jan. 20, 2023 at strikes from $40 - $60 in margin accounts with excess free buying power. Worst-case, forced purchase prices, with WBA at $39.88, dipped to from $30.70 to $35.64 per share. Downturns of 10.6% to 23.0% from the trade inception price wouldn't hurt, depending on the strike price selected. Maximum profits would be $930 on the $40 strike, $1,550 on the $50s or $2,436 per 100-share commitment using a $60 strike price, if the puts go on to expire worthless, as I expect they will. If you wait for the good news to kick in, you'll have missed the easiest part of the coming rebound. Buy some shares, sell some in-the-money LEAP (long-term equity anticipation security) puts on WBA, or consider doing both. (CVS is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stock? Learn more now.)

I've Got a Prescription That Will Give Your Portfolio a Shot in the Arm

It's one of the most hated members of the Dow -- WBA -- and it's set to outperform.

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