Should Walgreen Be in Your Portfolio?

Pills

With shares of Walgreen (NYSE:WAG) trading around $45, is WAG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Walgreen operates a drugstore chain in the United States. The company provides its customers with access to consumer goods and services, pharmacy, and health and wellness services in communities across the U.S.. Walgreen sells prescription and non-prescription drugs, as well as general merchandise that includes household items, convenience and fresh foods, photo finishing, and candy. General convenience and wellness merchandise is important to consumers across the nation, and Walgreen is a go-to shop for quick and efficient general merchandise and health and wellness experience for consumers that should continue well into the future.

T = Technicals on the Stock Chart are Strong

Walgreen stock has been part of a range extending back several years. The stock has seen an explosive move to the top of the range, where it is seeing a pause in its move. Analyzing the price trend and its strength can be done using key simple moving averages: 50-day (pink), 100-day (blue), and 200-day (yellow). As seen in the daily price chart below (source: Thinkorswim), Walgreen is trading between its rising key averages, which signals neutral price action in the near term.

WAG

Taking a look at the implied volatility and implied volatility skew levels of Walgreen options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Walgreen Options

27.57%

23%

20%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the past 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Wednesday, there is an average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Improving Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions also help gauge investor sentiment on the stock. What do the last four quarterly earnings and year-over-year revenue growth figures for Walgreen look like and, more important, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

18.06%

1.28%

-31.75%

-54.65%

Revenue Growth (Y-O-Y)

3.16%

-0.02%

-4.63%

-4.98%

Earnings Reaction

-5.89%

5.44%

-3.30%

-0.43%

Walgreen has seen improving earnings and revenue figures in the past four quarters. From these numbers, the markets have had mixed feelings about Walgreen’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Walgreen done relative to its peers – CVS Caremark (NYSE:CVS), Rite Aid (NYSE:RAD), Wal-Mart (NYSE:WMT) — and the sector?

Walgreen

CVS Caremark

Rite Aid

Wal-Mart

Sector

Year-to-Date Return

22.16%

18.49%

108.82%

9.85%

12.43%

Walgreen has been a relative performance leader year-to-date.

Conclusion

Walgreen is a pharmacy and general merchandise retailer that provides health, wellness, and other general products to consumers across the nation. The stock has seen a powerful move higher but is now retracting a bit after hitting the top of a multi-year range. Over the past four quarters, investors have had mixed feelings about the company, although earnings and revenue figures have been improving. Relative to its peers and sector, Walgreen has been a year-to-date performance leader. WAIT AND SEE what Walgreen does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.