The end of June is almost upon us. Where did half of 2023 go?
Well, the major market indexes have bounced back from the brutal drops of 2022. The S&P 500 has gained 18% this year on a dividend-adjusted basis, while the tech-heavy Nasdaq Composite index posted a 23% gain over the same period. The end-of-month unemployment and personal spending reports could move the market, but my magic eight-ball is in for repairs, so I wouldn't know whether the surprises will be bullish or bearish.
But I do see potential potholes in the road ahead for a couple of stocks.
In particular, I'm worried about cruise line operator Carnival Cruise Lines (CCL -0.66%) and pharmacy-and-convenience veteran Walgreens Boots Alliance (WBA 0.57%). Both will report quarterly results next week, and I don't expect game-changing earnings surprises.
On the upside, I can recommend two stronger investment ideas in the same corners of the consumer goods sector. So let's get started.
Is it wise to bet against Carnival?
It might sound silly to bet against Carnival right now. After all, people are flocking to Carnival's cruise terminals again after the coronavirus limitations and the inflation-based drop in consumer spending. The company expects every cruise to be fully booked this summer as the market releases pent-up demand for vacations not taken in previous years.
However, it will take more than a few quarters of strong sales to heal Carnival's wounds. The company runs a mercilessly unprofitable business with deeply negative profit margins and a long string of negative free cash flow readings. And the trailing-12-month top line still sits nearly 30% below pre-pandemic levels.
As a result, Carnival keeps the lights on through a steady increase in debt papers and stock sales, rarely paired with a matching increase in cash reserves:
CCL Total Long Term Debt (Quarterly) data by YCharts.
I don't expect next week's report to break any of these worrisome long-term trends. In spite of soaring ticket sales, Carnival keeps burning cash in every quarter. These troublesome details are already priced into Carnival's share price, which remains nearly 80% below the all-time highs of 2018, but the stock is prone to explosive volatility in either direction on the slightest of pushes.
So I don't recommend owning Carnival Cruise Lines in general and particularly not on the eve of a potentially market-moving event like the upcoming earnings report. You don't want to be stuck on the wrong side of that coin flip.
Carnival is not the only deeply discounted stock in the orbit of consumer-friendly entertainment, though. Media-streaming technology expert Roku (ROKU -10.29%) has seen its stock price drop more than 85% from its 2021 highs -- but for all the wrong reasons. Market makers have seemingly tossed Roku into Wall Street's bargain bin as if the temporary slowdown in digital advertising sales were a permanent fixture.
It's not, and Roku is poised for a dramatic recovery as the ad market rebounds from last year's inflation-driven crash. Roku's stock is a no-brainer buy in my eyes, offering a much stronger investment opportunity than Carnival's debt-burdened turnaround effort.
WBA Revenue (TTM) data by YCharts.
Can Walgreens find a foothold in the evolving primary care market?
Let's move on to Walgreens.
The once-mighty pharmacy giant doesn't look invincible anymore. The company is trying some promising ideas to kick new life into its stalled business growth, but the new operations come with burly problems of their own.
Walgreens' main growth engine these days is found in the VillageMD primary healthcare network, where the company established a controlling investment stake in the fall of 2021. In turn, VillageMD has been on a shopping spree lately, adding a plethora of local primary care networks in places like Colorado, Connecticut, Kentucky, and Texas. Chiefly, the buyout binge included the 680 health providers of Summit Health-CityMD across 29 American markets, dramatically boosting VillageMD's and Walgreens' primary care footprint.
I respect the effort, but Walgreens picked a difficult time to lean into the primary care market. Everyone else is doing it, too -- including a few deep-pocketed newcomers to the health sector.
- Arch rival CVS Health (CVS -0.22%) spent $10.6 billion on the primary care network Oak Street Health. OK, all right -- not a shocker. Who else is getting into the primary care market?
- Retail titan Walmart (WMT -0.08%) dipped its first toe into primary care services in 2019. This network has grown to 32 locations -- conveniently located in high-traffic Walmart stores -- and will more than double to 76 centers in 2024.
- Amazon (AMZN 3.43%) approached this opportunity from a different angle, buying out the telehealth provider One Medical for $3.9 billion.
Amazon's method also underscores the wide availability of remote primary care options, spearheaded by telehealth veteran Teladoc (TDOC -2.40%). That long-term sea change has lost much of the momentum it gained during the lockdown-tinted early days of the COVID-19 pandemic, but telehealth remains a potentially powerful challenge to physical office visits.
Next week's earnings report will cover Walgreens' first full quarter since VillageMD closed the Summit Health acquisition. The report could show nothing but rainbows and butterflies as consumers flock to the convenience of a Walgreens-backed system of primary care providers. But they could also select any of the other newfangled primary care options, some of which have at least as much branding power and convenience as Walgreens.
I would rather wait and see how the ambitious Summit Health project is working out before putting my hard-earned cash to work in Walgreens Boots Alliance shares. And I'm not alone on the sidelines, judging by the stock's bargain-bin valuation at 6 times earnings and 0.2 times sales.
Teladoc looks like a much safer bet right now. The telehealth leader's sales have tripled in three years, but investors threw this innovative stock out with the bathwater when the first effective coronavirus vaccines arrived.
"Done well, the transition to a tele-driven health system could be accomplished in a few years," according to a Robert Pearl article in Harvard Business Review last year. The former CEO of Kaiser Permanente, which is one of the largest medical systems in America, should have a deep understanding of how the health market works.
In other words, the best may lie ahead for the extreme convenience and increasing consumer reach of telehealth services. If you're looking for a solid long-term investment in the medical field right now, I suggest picking up some Teladoc stock at a 92% discount from the all-time high in early 2021.
