The Long and The Short of It

By Michael Hlinka

            In March’s column, I noted that sanity was returning to the stock market, and now I think I want to take it back. Right now, the market seems irrationally exuberant when it comes to some of the ultra large-cap names. In many cases, these names have exhibited, at best, above average growth over the past few years. At the same time, there’s a legion of smaller companies trading at prices similar to their COVID lows.

            One of those companies is Walgreens Boots Alliance Inc (NASDAQ: WBA), which closed the month of September at a price of USD$22.24.

            This is a company that operates more than 13,000 pharmacies world-wide, with most locations in the United States and Great Britain.

            That being said, there are valid reasons why a company that traded over $50 two years ago has been cut in half. For one, the collapse in its share price mirrored the tenure of Roz Brewer. The good news is she stepped down one month ago, and the search for a permanent replacement is ongoing.

            This has to be considered a plum job – WBA is a company that earned almost $3 per share two years ago (before Ms. Brewer blew things up!), and is now trading at a price to sales ratio of approximately 0.14.

            I’m not sure if its dividend is completely safe… but let’s assume that it is.  WBA is yielding north of 8.5% and if it was priced to yield 5%, it would translate to a price of $38.40 per share!  I’m not quite that sanguine, but it seems that $35 is a realistic target which could be reached within the next two years, translating to a capital gain of 57%. Time will tell.

            This month’s short is DoorDash Inc (NASDAQ:DASH) which closed the month of September at USD$79.47. Although I’m very often nervous when rendering an opinion about a company whose business model makes little sense to me, I’ll give it a try today.

            What I mean by that, is I just don’t see where the barriers to entry are with this business model adopted by DoorDash. The company seems like no more than a plain vanilla delivery service, and I don’t see how as it scales to enjoy significant economies of scale.

            DASH is trading at current levels because of its very impressive growth over the past few years, but it seems to be abating: year-over-year revenue growth for the quarter ending March 2023 was 40%, while it was 33% for the quarter ending June 2023. At $79.47 DASH is priced for perfection, and nothing is perfect in this world. I would not be comfortable paying more than $30 for this stock; however, I cheerfully admit that not everyone sees the world of investing the way that I do.  I’m going to give it a more conservative target of USD$50.00 per share which translates to a haircut of about 37.5%.

Bottom line (all prices in USD):

• 2-year price target for WBA: $35.00 (currently $22.24)
• 2-year price target for DASH: $50.00 (currently $79.47)

All articles published by PAIP Canada Inc. are for informative purposes only, and do not constitute advice. We recommending consulting by a subject matter expert before making any financial decision(s).