Signs of Turnaround

I have always been fascinated by how stocks turnaround and what role fundamentals play in changing the perception and turnaround. Here are two stocks that have underperformed for years now but showing classic signs of a turnaround. 

The Concept: There is a time when the stock forms resistance and sells off (downtrend) and then there is a time when the stock breaks past the resistance, pulls back, and rallies (turnaround). It is when the stock changes its character i.e. moves past the resistance, it’s called a classic turnaround play

Theme: Pharmacy Chain
Will Covid testing and Vaccination be the spark that triggers turnaround?

I am talking about Walgreens WBA

As you can see in the weekly chart above, Walgreens stock stalled at 100 week moving average (1) and sold off. It rallied from lows but this time stalled at 50-week moving average (2) and as the time progressed, it could not even break past 20 week moving average (3). Once the trend was decimated, the Horizontal Line of resistance at 44 became too difficult to surpass.

But then things started turning around in Nov 2020, it first moved past 20-week moving average but stalled at Horizontal Line of Resistance and now this year it has broken past 44 and now trying to break past 100-week ma. The turnaround is in progress and the stock seems must buy on declines near 44. The stock is well set to rally back to 62-64 over the next 3-4 months.

This is not a momentum stock. Amazon has already announced its Online Pharmacy business plan and hence there will always be skeptics but in a market where lots of fund managers are seeking safety, Walgreens will find buyers on declines. Walgreens transformation plan of cutting down expenses, and opening full service clinics is in making and so it would be interesting to watch how this plays out.

Purely Price Action wise, the stock has turned around with many investors now looking to buy the dips.

CVS is trying to breakout from period of underperformance

The chart is quite self explanatory. The stock is trading just below the Line of resistance and a breakout here will attract outperformance money. I like when stocks of the same sector move together. Jefferies analyst last week upgraded the stock with a new price target of $90 on the back of vaccine rollout.

Both these stocks are not momentum stocks and hence one should have a reasonable expectations with these stocks. They will make a move but it will be slow and steady.

Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers