Drug store stocks got slammed in Tuesday's session after Amazon.com, Inc. (AMZN) announced the launch of an online pharmacy, dropping shares of new rivals between 9% and 20%. The move signals an overnight paradigm shift for the industry, potentially placing a numbers of franchises at risk. It will also affect supermarkets, super-stores, and other businesses that rely on pharmacies to increase foot traffic.

Key Takeaways

  • Drug store and drug distribution stocks sold off after Amazon launched an online pharmacy.
  • Additional downside is likely in coming sessions.
  • Amazon's entry will put pressure on drug prices and industry profits.
  • Competitors are likely to respond with free delivery services.

On the flip side, it's obviously good news for consumers, with Amazon's huge footprint holding down drug prices. That recognition triggered a sympathetic exodus from drug distribution stocks, with Cardinal Health, Inc. (CAH), McKesson Corporation (MCK), and AmerisourceBergen Corporation (ABC) taking sizable hits. However, this impact is less certain because prices have been under a microscope since 2015, when industry scandals triggered public anger and Congressional investigations.

Amazon's service allows customers to choose co-pays and has a non-insurance option, with heavy discounts for Prime members. It couldn't come at a better time for those most vulnerable to COVID-19 because many pharmacies don't offer free delivery or drive-thru facilities, forcing customers to enter closed ventilation systems and wait in line. It's only up and running in 45 states at the moment, although Amazon expects to add the other five states "in the future."

Foot traffic is a term used in business to describe the number of customers that enter a store, mall, or location. Foot traffic numbers are heavily monitored by store owners in particular retail stores, such as department stores. Foot traffic – or customer traffic – is an important metric because higher foot traffic tends to lead to higher sales and revenue numbers.

Chart showing the share price performance of CVS Health Corporation (CVS)
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CVS Health Corporation (CVS) broke out to a 10-month high one day before the news and turned tail in a bearish abandoned baby reversal, dropping nearly 9%. The company is less dependent on retail drug sales than its competitors due to the 2019 Aetna merger. Even so, CVS has the most to lose as the nation's largest pharmacy chain with the highest total revenue, and the company will likely meet the challenge with new delivery and membership services.

The stock is rebounding in Wednesday's pre-market, but additional downside is likely in coming weeks, perhaps reaching strong support at the 50-week exponential moving average (EMA) in the low $60s. Even so, the selloff has reinforced tough resistance at $70 while maintaining a volatile downtrend that has been controlling the tape since the summer of 2015. The stock price has been cut in half during this period, forcing long-term shareholders to rely on a forward dividend yield that now stands at 2.98%.

Chart showing the share price performance of Walgreens Boots Alliance, Inc. (WBA)
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Dow component Walgreens Boots Alliance, Inc. (WBA) fell nearly 10%, one session after completing a breakout above the 50-week EMA. The stock topped out at the same time as its rival in 2015, entering a downtrend that has carved an endless string of lower highs and lower lows. It has lost about two-thirds of its value during this period, while its Dow membership has done nothing to staunch the bleeding.

The stock has hit four lower lows since the March selloff, highlighting unusual weakness. It posted an eight-year low at the end of October and turned higher, completing a double bottom reversal about one week later. The relatively strong action set off a number of buying signals that culminated with the moving average breakout. Many newly minted shareholders have been caught in this bull trap, raising the odds that they'll be exiting at lower levels in coming sessions.

A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. 

The Bottom Line

Amazon's entry into the pharmacy business has sent shock waves through an industry unaccustomed to competition.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.