All three major indexes finished the day down after a week of increased volatility. We saw the market whipsaw back and forth over concerns of market disruption from retail traders targeting notable shorted stocks. In the midst of mixed economic reports, and mostly positive fourth-quarter earnings results, I remain focused on a potential stimulus package and a renewed spotlight on the vaccine front. 

The Biden administration has set its attention to getting as many people vaccinated as possible so we can return to some sense of normal. I see this as a positive for pharmacies as drug stores will be essential in administering the vaccine. That’s why I am recommending pharmacy stocks such as CVS Health Corporation (CVS), Rite Aid Corporation (RAD), and Walgreens Boots Alliance, Inc. (WBA).

But first, let’s take a more in-depth look at how the market has performed over the past few days.

Market Commentary

Following relatively normal trading sessions on Monday and Tuesday, the market saw sharp losses on Wednesday as investors grew concerned over the Federal Open Market Committee’s January monetary policy decision. The Federal Reserve emphasized that the pace of the economic recovery had slowed in recent months.

The indexes bounced back on Thursday, rebounding from their worst one-day decline since October. Investors were focused on corporate earnings results from the largest publicly traded companies, while stocks that were previously driven up by speculative trading finished the day lower. The market sold off again today due to concerns over volatility and speculative trading in highly shorted stocks.

The market had been trending higher since November, primarily due to positive news on the vaccine front. This was a boon for cyclical stocks in the energy, financials, and materials sectors. Since the beginning of the earnings season, though, these sectors have been underperforming, while tech stocks have gained strength.

Market Outlook

While volatility has picked back up recently, the indexes are not too far off their all-time highs. Earnings as a whole look quite strong, along with positive estimate revisions for 2021. This makes me believe that the market has more room to run, especially with additional fiscal stimulus and accommodative Fed policy.

This growth, though, is predicated on a large stimulus bill and progress on vaccinations. We need a majority of the population to get vaccinated for us to return to the “old normal.” The President increased his original pledge of 100 million doses in his first 100 days to 150 million. This is possible through the purchase of 100 million doses from the Pfizer (PFE) and Moderna (MRNA) vaccines and the additional availability of the AstraZeneca (AZN) and Johnson & Johnson (JNJ) vaccines.

To get all these vaccines out, the U.S. government created a partnership with approximately 40,000 pharmacies to help administer the coronavirus vaccine. Since pharmacies already have the flu vaccines’ experience, they are the logical solution to get the population vaccinated quickly. This could provide a windfall for drug stores that saw foot traffic plummet during the pandemic. While people head back into the store, they are likely to stay and buy additional items. As their revenue increases, their stock prices are likely to follow. That’s why I am highlighting the three pharmacy stocks below.

CVS Health Corporation (CVS)

Jeffries analyst Brian Tanquilut upgraded CVS stock to a Buy earlier this month based on the President’s pharmacy plan. He believes that the vaccine will bring back customers who will purchase other items after receiving their free vaccine shots. He believes that the company could see an additional $1 billion in profits over the next year.

CVS has almost 10,000 locations and has been working on the vaccine rollout since the summer. It hired 10,000 pharmacy technicians, pharmacists, and nurses to help with the vaccines and has trained 12,000 technicians to administer shots. CVS will have an app and an 800 number that people can use to sign up for the vaccine shots. The company has also benefited from testing as it has conducted more than six million COVID tests and has doubled the number of testing sites across the country to more than 4,000.

The stock is rated a Strong Buy in our POWR Ratings system. It holds a grade of A in Trade Grade and Buy & Hold Grade and a B for Industry Rank. It is also the #1 ranked stock in the Medical – Drug Stores industry.

Rite Aid Corporation (RAD)

RAD has already benefited from the coronavirus pandemic as it expanded its services to provide home service delivery to customers with an eligible prescription at zero delivery fees. It also launched a Buy Online Pickup in Store initiative to offer better drive-through and curbside pickup options. The company has already conducted 1 million COVID and is working with the CDC to distribute vaccines.

This has led to impressive third-quarter fiscal 2021 results. Revenues grew 12% due to strong performance in the Retail Pharmacy and Pharmacy Services segments. Where the company lost revenue, though, was in over-the-counter products as masks and social distancing cut down on normal illnesses such as colds. This reduced the demand for OTC products such as Tylenol and cough syrup. As RAD starts administrating the vaccines, the company is likely to see a strong rebound in in-store purchases.

The stock is rated a Buy in our POWR Ratings system. It holds a grade of A for Trade Grade and a B for Peer Grade and Industry Rank. It is also the #4 ranked stock in the Medical – Drug Stores industry.

Walgreens Boots Alliance, Inc. (WBA)

Similar to CVS, WBA is also in a prime position to administer the vaccines. Most locations have private rooms where pharmacists can provide the shots and can even utilize old photo labs. The company has already started providing customers with educational information on vaccines’ availability and is looking to implement a marketing campaign for when the vaccine becomes widely available.

The company has also been gaining through alliances. This month, WBA announced an agreement with AmerisourceBergen (ABC) to sell its international healthcare and distribution business alliance. Also, the company’s partnership with VillageMD has expanded its primary care clinics. WBA plans to open over 600 Village Medical at Walgreens primary care clinics in more than 30 U.S. markets over the next four years.

The stock is rated a Buy in our POWR Ratings system. It holds a grade of A for Trade Grade and a B for Buy & Hold Grade and Industry Rank. It is also the #3 ranked stock in the Medical – Drug Stores industry.

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CVS shares . Year-to-date, CVS has gained 5.61%, versus a -1.02% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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