Walgreens Beats Earnings but Remains in Trading Range

Pharmaceutical giant and component of the Dow Jones Industrial Average Walgreens Boots Alliance, Inc. (WBA) topped earnings per share (EPS) estimates before the opening bell on Monday, Oct. 28. The stock stayed in a trading range between its fourth quarter value level at $48.98 and its semiannual risky level at $57.74.

Walgreens continues to struggle, and additional store closures and layoffs will continue through 2022. Comparable sales in U.S. Walgreens pharmacies rose on higher prices for prescription drugs and other medications. De-emphasis on tobacco products and suspending e-cigarettes was a hit to the bottom line.

The pharmaceutical giant is in transition to becoming a health care provider, and the stock offers a generous dividend. My call is to buy the stock down to its quarterly value level at $48.98, which lines up with its 2019 low of $49.03 set on Aug. 28. The fundamental reason to buy the stock now is that its P/E ratio is just 9.00 with a dividend of 3.36%, according to Macrotrends. This dividend yield qualifies the stock to be a member of the "Dogs of the Dow" in 2020.

Walgreens stock closed Monday, Oct. 28, at $55.80, down 18.3% year to date and in bear market territory at 35.3% below its 52-week high of $86.31 set on Dec. 4, 2018. The stock is up 13.8% from its Aug. 3 low of $49.03. Going back to the high of $97.30 set in August 2015, the stock is trying to bottom from a bear market decline of nearly 50%.

Earlier this month, Walgreens announced its decision to stop selling e-cigarette products at all stores nationwide. Vaping has become a health care issue, and the pharmacy chain acted. Earlier this year, it offered a health care initiative to help cancer patients. The program called "Feel More Like You" helps cancer patients look and feel more comfortable with cosmetics while they fight this tough decease.

To increase foot traffic in Walgreens stores, the company has a deal with FedEx Corporation (FDX), where customers can drop off e-commerce packages for return. The pharmacy prepares packages for return, and FedEx picks them up. While customers are in the store, they may browse the aisles and purchase items. Moving forward, Walgreens is considering partnerships in store locations with Jenny Craig as well as dental and doctor offices.

The daily chart for Walgreens

The daily chart for Walgreens shows the stock's decline since trading as high as $86.31 on Dec. 4, 2018. The stock had a "key reversal" day on Dec. 26, when it set a cycle low of $64.51 and then closed that day at $67.72, which was above the Dec. 24 high of $67.20. This tracked the stock to its 2019 high of $74.94 on Feb. 19.

The annual risky level is above the chart at $90.13. The monthly value level for October is below the chart at $40.70. The horizontal lines should be considered a trading range between its fourth quarter value level at $48.98 and its second half semiannual risky level at $57.74, last tested on Sep. 12.

The weekly chart for Walgreens

The weekly chart for Walgreens is positive, with the stock above its five-week modified moving average of $54.54 and well below its 200-week simple moving average, or "reversion to the mean," at $72.64, last crossed during the week of Dec. 14, 2018, when the average was $79.49.

The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 62.32 this week, up from 57.77 on Oct. 25. Back at the end of May, when the stock traded as low as $49.31, this reading was 4.38, well below the 10.00 threshold, which made the stock technically "too cheap to ignore." From this low to the July 11 high of $56.95, the stock gained 15%.

I consider the May 31 low of $49.31 and the Aug. 28 low of $49.03 as a potential double bottom.

Trading strategy: Buy Walgreens stock down to its quarterly value level at $48.98 and reduce holdings on strength to its semiannual pivot at $57.74.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.