Pharmacy Chains Could Reward Bottom Fishers in 2020

Beaten-down pharmacy chains could offer profitable turnaround plays in 2020, completing long-term bottoms and entering new uptrends. However, the big players have little in common, telling bottom pickers to choose exposure that matches their specific interests. For example, CVS Health Corporation (CVS) also owns health care giant Aetna, increasing risk from Democratic hopefuls who want to replace America's private health care system with Medicare-for-All.

The pharmacy group showed signs of life in the second half of 2019, driven by a variety of positive factors that included speculation about private equity buyouts. Major short squeezes and broad index strength added to upside pressure, making these stocks more expensive than they were just last summer. Even so, potential upside looks considerable, while healthy dividends at two of the three chains should let nervous shareholders sleep at night.

Chart showing the share price performance of CVS Health Corporation (CVS)

CVS Health Corporation shares broke out above the 2008 high in the mid-$40s in 2012 and entered a powerful uptrend that posted an all-time high at $113.65 in July 2015. The subsequent downturn broke 2015 support in the low $80s at the end of 2016, driven by fears that the Trump administration would put a lid on rising drug costs. CVS stock posted a volatile series of lower lows into March 2019, potentially bottoming out at a six-year low in the mid-$50s.

The stock rallied out of a six-month basing pattern in August and mounted the 200-day exponential moving average (EMA) in September. It added to gains into December but still hasn't ended the string of lower highs in place since 2016. The uptick has now stalled at the .382 Fibonacci sell-off retracement level, while a shallow trendline marks heavier resistance near $80. Given this bearish configuration, the best strategy will be to wait for the next downturn, looking for a low-risk entry closer to $60.

Chart showing the share price performance of Walgreens Boots Alliance, Inc. (WBA)

Dow component Walgreens Boots Alliance, Inc. (WBA) broke out above 2006 resistance near $50 in 2013 and entered a trend advance that posted an all-time high at $97.30 in the summer of 2015. The subsequent pullback found support near $70 in 2016, filling out a trading range that broke to the downside in 2017. The evolving downtrend posted even lower lows in 2018 and 2019 but may have bottomed out at a six-year low on top of the 2013 breakout level.

The stock ripped higher in November after media outlets reported that the company was engaged in buyout discussions with a private equity firm. Skepticism took hold after a multi-day advance, and the current status of the pursuit is still unknown, but that could change when the company reports earnings next week. The next sign of better times for the struggling chain will likely come with a rally that tests the fourth quarter high in the mid-$60s.

Chart showing the share price performance of Rite Aid Corporation (RAD)

Rite Aid Corporation (RAD) posted a 1-for-20 reverse split in April 2019, which accounts for the chart's lofty numbers. The stock has carved a more bearish pattern than its rivals in the past decade, completing a round trip into the 2007 high in 2014 and failing three breakout attempts into the first quarter of 2017. It broke down from a triple top a few months later, entering a steep downtrend that posted an all-time low at $5.04 in August 2019.

A vertical short squeeze erupted in December, tripling the stock price in just eight sessions. The buying spike ended at $23.88, giving way to a pullback that is now gathering momentum. The 200-day EMA near $11 should offer support during this decline, but continued high volatility could stretch that trading floor, dumping price back into the high single digits before committed buyers return in force.

The Bottom Line

Shares of pharmacy chains underperformed badly in 2019 but could offer bottom fishers with opportune profits in coming months.

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

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