To The Moon

$Walgreens Boots Alliance(WBA)$

Walgreens Announcement and Investor Lessons

Walgreens announced today that it will go private in a deal worth around $10 billion with Sycamore Partners. I wanted to discuss some lessons investors can take away from this, as well as why I personally don't invest in turnaround stocks. This example really highlights why avoiding certain investment strategies can save you from making costly mistakes.

My Investing Journey and the Rise of Dividend Growth Investing

I first started writing about investing nearly 10 years ago, back in the third quarter of 2015. At that time, Seeking Alpha was a hotspot for dividend growth investors (and still is), but this was especially true before AI and other trends took over. Because bond yields were so low, dividend growth investing became a popular strategy. It made sense back then, and I’m actually planning to make a video about dividend growth investing soon, so stay tuned for that.

The Long History of Walgreens Articles

But as I was looking back at the past 10 years, I remembered seeing so many articles about Walgreens. There were literally hundreds of "buy" and "strong buy" rated articles on the stock from around 2015, when its price peaked, all the way through to today. This leads me to ask: how can so many investors make the same mistake for such a long time?

Why I Avoided Walgreens and the Stock's Decline

I never bought Walgreens, but I did make a article about why I avoided it. In that article, I discussed why I didn’t think it was a good investment. Back then, the stock was about $20 per share, and even though it had dropped 65% from its highs, I explained why I still wasn’t interested. And now, we see that the stock has fallen another 50% since then, with the company being bought out.

Avoiding Turnaround Stocks

So, how could you have avoided this? Well, first of all, this is a prime example of why I avoid turnaround stocks. You never know if or when the turnaround will happen. If you bought at its peak, you’d have lost money, and even if you waited until it was down 65%, you still could have been waiting for a long time for any recovery. And in the end, the company just gets taken private.

Future Public Offering and New Investors

No doubt, Walgreens will eventually go public again—likely with a lot of hype—and new investors will be drawn in, many of whom may not even realize they're buying into a problematic stock. It’s just the nature of the game.

The Key Lesson: Risks of Turnaround Stocks

In short, the key lesson here is that turnaround stocks are risky, and often, they don't pan out the way investors hope.

The Dividends and Healthcare Stock Hype

Many people on Bloomberg often talk about the safety of dividend stocks and how reliable healthcare stocks are. However, in this case, it’s clear that these individuals were caught off guard, as their optimism didn’t pan out. So, how could you have avoided this? Let’s dive into that.

Avoiding Turnarounds and Key Warning Signs

Aside from simply avoiding turnaround stocks, it’s essential to be aware of what’s going on with the company. In this instance, it wasn’t strictly a turnaround yet, but one key thing to watch for is significant mergers and acquisitions (M&A). From 2012 to 2014, Walgreens merged with Alliance Boots for $6.4 billion, a deal that closed in 2014. During that time, the stock price stagnated, and the growth didn’t look very impressive. However, after the merger, things seemed to improve for a while, and the stock price shot up, reaching a P/E ratio of 25. But when we take a closer look at the earnings, we see that they had only one good year, and then they flatlined again.

The Pattern of M&A and Its Consequences

When Walgreens started facing stagnation again, they made another big move by acquiring Rite Aid for $9.4 billion in 2015. This was yet another attempt to revive the company, but these M&A deals often have a delayed impact. From experience, I’ve learned that when a company makes an acquisition that is more than 20% of its total value, it’s usually a red flag. Nine times out of ten, such acquisitions don’t work out as planned. It might seem positive at first, but eventually, reality sets in, and the stock price typically takes a hit.

The Revenue Decline Warning Sign

Here’s where it gets tricky—M&A deals can mask the underlying issues. My personal rule used to be to pay attention to the three-year revenue trend. If a company’s revenue is lower now than it was three years ago (and there’s no recession or major external factor to explain it), that’s a sign to consider selling or avoiding the stock. It’s often a sign of declining earnings, increased competition, or changing consumer tastes. Unfortunately, CEOs can be very good at convincing themselves (and investors) that they can turn things around, which leads them to continue making acquisitions to inflate revenue numbers temporarily.

Stretching the Timeline: The Four-Year Rule

While I once followed a strict three-year rule, I’ve since adjusted it to a four-year rule. The reason is that companies can stretch things out longer than expected, fooling investors into thinking things are fine. It can take years before the market catches up and starts recognizing the decline. Walgreens’ 10-year decline is a perfect example of this, where many people likely bought the stock during its downward trajectory, thinking it was a bargain.

Looking at the COVID Impact and the Final Signs

Going into 2020, Walgreens’ three-year revenue was barely positive, even after all their acquisitions. While COVID might have given them an excuse for a downturn, the lack of recovery after a couple of years indicated that the problems weren’t just temporary. By 2023, when I made the video discussing the stock, it was clear that Walgreens was on a downward trajectory. Earnings were decreasing, stock price was falling, and the signs pointed toward a continued decline.

The Reality of Turnarounds and Company Decline

When looking at a company like Walgreens, the decline becomes more obvious over time. Companies can attempt to turn things around, but it's an incredibly difficult task, and in many cases, it just doesn’t happen. By the time you realize it, you're often too late to save your investment.

The Uncertainty of Turnarounds

Even when a turnaround is successful, it’s impossible to know how long it will take or where the stock will ultimately bottom out. In this case, Walgreens bottomed out at about half of the value when I made the video, and nearly 90% lower than its peak. Despite being a well-known brand with almost 100 years of history, none of that matters. The dividend streaks are irrelevant if you waited until they cut the dividend to sell, in which case you'd be down about 80%. And if you bought it back at the peak, you’d have wasted 15 years holding a stock that kept losing value.

Real Turnarounds Do Happen, But Timing is Key

That being said, real turnarounds do happen sometimes. The challenge is that I personally don’t have the insight or skill to both pick a successful turnaround and time it right enough to make money from it in time. Timing is a crucial factor here. When comparing this to something like the S&P 500, which has likely returned around 200% over the same period, the opportunity cost of holding onto Walgreens is even worse. Instead of just losing 90%, you could have seen a gain of thousands of percent by sticking with an index like the S&P 500.

Caution with M&A and Inflated Numbers

So, my word of caution here is to keep an eye on big M&A deals, especially when you can see that a company’s growth is declining. M&A can mask underlying issues, and it’s important to watch the revenue trends closely. Also, be aware of companies inflating their revenue or earnings. They might do this by buying back shares, taking on more debt, or borrowing money to pay dividends in order to maintain their streak. These tactics can make the company look more appealing in the short term, but they don’t necessarily reflect healthy long-term growth.

Why I Avoid These Types of Stocks

These strategies are often attempts to “hold out” and hope for better days. In my experience, that’s why I choose not to invest in turnaround stocks. I hope this serves as a valuable lesson for others. I’ll be adding this to my playlist for new investors or case studies, as it’s a classic example of what can happen when things go wrong. Looking ahead, someday you’ll see Walgreens’ assets or similar companies come back on the market, and the media will hype it up. But by then, you'll know better than to buy in because they’ll just be trying to unload it on you.

Conclusion

That’s all for today. I hope this perspective helps as you navigate investing and avoid making similar mistakes.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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