Walgreens Boots Alliance (WBA 0.57%), Verizon Communications (VZ 1.17%), and Advance Auto Parts (AAP 0.58%) are three stocks that aren't in great shape these days. Investors are concerned about their financial situations both in the near and long term, and that has put some significant pressure on their valuations this year.
Below, I'll look at what has led investors to be so bearish on these stocks, and whether there's a good contrarian case to be made for investing in any of them.
1. Walgreens Boots Alliance
Walgreens Boots Alliance has been struggling badly over the years, and 2023 has been no exception, with the pharmacy chain's shares down 18% thus far. The company is no longer benefiting from an uptick in in-store traffic due to COVID vaccinations.
Although sales of $35.4 billion for the period ended May 31 were up 8.6% year over year, the company's earnings per share (EPS) fell from $0.33 to $0.14, with Walgreens blaming the underwhelming performance on COVID-19 headwinds. It also slashed its guidance for the fiscal year, now projecting adjusted EPS to be no higher than $4.05 (the previous forecast projected adjusted EPS to be at least $4.45).
For a company that has struggled with growth over the years, that's a surefire recipe for disaster. Although its dividend yield may look attractive at 6.5%, investors are more than a little wary of Walgreens as the stock is trading around prices it was at in 2012.
There's ample risk here. Walgreens' bottom line is going in the wrong direction, and the company is also investing billions into a new healthcare segment that may not pay off and be profitable for multiple years. That raises question marks about the safety of the dividend, which is a big reason why investors undoubtedly buy the healthcare stock.
While Walgreens looks like it may be undervalued right now, investors should be careful with the stock as it is a chronic underperformer. It could make for a good contrarian investment, but you have to be a big believer that its venture into healthcare will pay off.
2. Verizon Communications
Verizon is one of the leading telecom companies in the industry, but a big risk surrounding its business today is its exposure to lead-covered cables. The potential liability surrounding that has made investors incredibly bearish on what is otherwise a stable business. Down 14% this year, Verizon has nevertheless been the best-performing stock on this list.
At 7.7%, the stock's yield is even higher than Walgreens' current payout. And with the stock closing at less than $34 last week, you'd have to go back to 2010 for the last time Verizon's stock was trading at consistently lower prices than where it is right now.
Investors should consider the risks related to lead-covered cables, especially since it could cost the company billions of dollars, but they also shouldn't exaggerate it either; there's no certainty as to how much the company may have to pay. Meanwhile, the stock's payout ratio is around 50% of earnings, so there is a buffer there for the company to absorb some adversity and still be able to continue paying its dividend.
Given the relative stability of the business, Verizon makes for a compelling contrarian investment right now. It's by no means risk-free, but with its low valuation it could have significant upside if things don't turn out as badly as investors are fearing they will.
3. Advance Auto Parts
Earlier this year, Advance Auto Parts not only slashed its guidance for the year but also its dividend, from quarterly payments of $1.50 to just $0.25. At 1.4%, the dividend yield is now a much more modest payout than the two other dividend stocks on this list pay. And as a result of the troubling outlook, investors have been quick to dump the stock, sending it down a staggering 52% year to date.
The auto parts company has been struggling amid rising costs and challenging macroeconomic conditions this year. For the period ended April 22, sales of $3.4 billion were only up 1.3% year over year, but selling, general, and administrative costs rose by around 6% to just under $1.4 billion, and interest expenses more than doubled to nearly $30 million.
At a time when economic conditions look concerning, there are no shortage of challenges facing Advance Auto Parts, and neither its top nor its bottom line is looking great right now. The stock looks cheap and is trading at around where it was in 2012, but even contrarian investors may be better off taking a wait-and-see approach with the company.
Worsening economic conditions could lead to even more of a drag on its already lackluster financials, which may result in a lower stock price this year.
