Big Potential Brewing – Will Walgreens Deliver a Rally?

Key Points

• Walgreens stock is proposing a double-digit rally this week, as earnings could act as a significant catalyst for a run.
• Management is betting on a shift away from brick-and-mortar locations and into digital-based businesses to expand margins.
• Options traders are now betting that the stock could rally this week on earnings, something to consider.

Every once in a while, a major brand name and its stock’s existence are challenged. Often, the price action and the threatening state of the company are justified, and the business does end up going under. Other times, this is not the case, and investors can catch a life-changing rally in their portfolios. Today, one stock offers investors such an opportunity.

It can be found in shares of healthcare sector retailer  Walgreens Boots Alliance Inc. NASDAQ: WBA now that they trade at only 33% of its 52-week high, which is where investors can begin to build a potential bull case carrying double-digit upside in the coming quarters, though there could be a catalyst to bring a rally much sooner than most out there think, particularly the bears.

The last time a stock was threatened to be de-listed due to falling fundamentals, the stock went on to a more than tenfold increase in only a few quarters. That stock was Carvana Co. NYSE: CVNA from early 2023 until today, as the company rallied from $7 a share to more than $192 in today’s market. The key is management making the right moves, and just like Carvana, Walgreens could be about to make it as well.

Investors Bet on Walgreens Stock Surge Ahead of Anticipated Major Announcement

It’s not as clear yet, but management is making a major shift ahead of its new quarterly earnings announcement this week. Realizing that the brick-and-mortar business model is not paying off anymore, management decided to start closing down some of its underperforming locations.

Now, while this will clear up some overhead costs and lease debt, helping margins and the bottom line, it will also potentially hurt Walgreens’ ability to generate revenue moving forward. At least, that is what bearish traders are betting on as they brought the stock’s short interest up to 13.3% of the entire share float.

These bears might be in for some pain, however, as Walgreens has announced double-digit growth in its digital products segment through Shields and VillageMD subscription-based business. As digital businesses, these segments will expand Walgreens’ margins and earnings to offset some of today's physical location headwinds.

Another benefit is decreased capital expenditure needs, as fewer physical locations need less inventory on hand and fewer overhead expenses, clearing up more cash flow for the company to focus on more productive investments.

These are some of the more obvious announcements that management can make this week, aiding a more optimistic future in the coming quarters, but there is also one more pending thesis out there. Walgreens is now offering shareholders a dividend yield of 10.9% today, taking away over $1 billion in cash flows that could be used to revitalize the business.

Cutting this dividend might not seem positive, but it is the right choice, however tough. Even with the low likelihood of this happening, Wall Street analysts are beginning to reflect a more optimistic outlook for the stock through their recent price targets.

Wall Street Signals Potential Rally for Walgreens Stock

Analysts' consensus price target on Walgreens stock is $13.5 a share, calling for up to 46.1% upside from today's price. However, investors should focus on the outlier ratings that have come in during recent months so that sentiment can be further gauged for the company.

Those at TD Cowen reiterated their Buy rating on Walgreens stock, this time coupling their view with a price target of up to $16 a share, which implies a significantly bigger upside of 74% from today's stock price. This further reiterates the potential rally inherent in Walgreens stock for the coming months, but there's more evidence to consider.

Others on Wall Street shared analyst enthusiasm for Walgreens stock. Allocators like Compagnie Lombard Odier boosted their holdings in the stock by 33.2% as of October 2024, bringing their position to a net $119,000 ahead of the earnings announcement.

Ultimately, investors can check the options activity for more precise bets being made in Walgreens stock. As of today, the options chain shows the highest open interest is set for $10 call options expiring only two days after the company announces its earnings report.

With up to 22,056 contracts open for this strike price and expiration, investors can safely assume that traders have a good idea of what could be coming to Walgreens stock this week, something to consider before the stock potentially becomes another Carvana run.