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Walgreens Boots Alliance Stock Jumps On Report Of A Possible Buyout. Here's Why Investors Should Tread Carefully.
Walgreens Boots Alliance (NASDAQ: WBA) stock looks to have finally received some much-needed bullishness from investors. The stock was jumping last week on rumors that a private equity firm may be buying the company. While Walgreens stock is still down more than 60% this year (as of the end of last week), it is showing signs of life of late.
But before you jump in and decide to take a chance on this beaten-down stock, there are some things to consider.
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An acquisition is not a surefire guarantee of a huge gain
According to an exclusive report from The Wall Street Journal, Walgreens is in talks with Sycamore Partners, a private equity firm, about a possible deal which could take the pharmacy retailer private.
Many investors appear to be reading this as a potentially bullish sign that Walgreens stock could net them a big return depending on how much Sycamore may agree to pay for the business. But there is a risk here, especially with Walgreens stock already jumping more than 21% last week.
Even if Sycamore does end up acquiring Walgreens, the price it pays will ultimately dictate the type of return investors get for the stock. And the higher Walgreens' stock rises, the smaller that potential upside may be. As of Friday's close, the stock was at a market cap of nearly $9 billion. If Sycamore pays less than that, investors who buy shares of Walgreens may still end up incurring losses even if the acquisition goes through, which is not a slam dunk, either.
The deal isn't a guarantee to go through
Another risk for investors to consider is what happens if the deal falls through. Walgreens is a struggling business that is having a hard time in not only growing but getting out of the red, having posted losses in three of its past four quarters.
And the long-term outlook isn't all that promising, either. Things may even get worse, as nowadays people can more easily buy prescriptions online and competition in the industry looks to be ramping up. The deeper Sycamore looks into the business, the more question marks and concerns it may have about Walgreens. And unless it is highly confident in its ability to turn things around, it may ultimately decide that it's too risky of an investment to take on.
The report says that it may be sometime "early next year" when a deal between Sycamore and Walgreens could be completed. But if that doesn't happen, investors could quickly dump the healthcare stock, sending it back to where it was before this recent excitement.
Walgreens stock still isn't worth the risk
Investing in a stock on the hopes of an acquisition can be incredibly risky. If the deal goes through, the price tag may not be as high as you were hoping for. And if it doesn't end up taking place at all, then you're left holding a stock that you may have not otherwise bought in the first place, if not for the hope of a potential acquisition.
It should be fundamentals that dictate whether you buy a stock or not. And unfortunately, that's an area in which Walgreens stock is severely lacking in right now. The company has a tough road ahead, and it may not be as simple as just closing underperforming stores to turn things around.
The safest option at this point is to keep Walgreens stock away from your portfolio and just keep it on a watch list for the time being. While it may be rallying right now, it may not take much for this volatile stock to quickly head in the opposite direction.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
