Will Walgreen Make All-Time Highs?

With shares of Walgreen (NYSE:WAG) trading around $48, is WAG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Lets analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Walgreen,together with its subsidiaries, 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 America. Walgreen offers its products and services through drugstores, as well as through mails, by telephone and online. It sells prescription and non-prescription drugs, as well as general merchandises, including household items, convenience and fresh foods, photofinishing and candy. Walgreen provides a convenient method to purchase many essential and highly demanded household products and services.

T = Technicals on the Stock Chart are Strong

Walgreen stock saw an amazing run in the late 1990s but has been range-bound since then. Currently, the stock is trading near the top of a multi-year range so a break higher can be very positive for its stock price and investors. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Walgreen is trading above its rising key averages which signal neutral to bullish price action in the near-term.

WAG

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(Source: Thinkorswim)

Taking a look at the implied volatility (red) 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

35.34%

93%

90%

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

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Walgreen’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Walgreen look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

1.28%

-31.75%

-55.17%

-4.62%

Revenue Growth (Y-O-Y)

0%

-4.63%

-5.01%

-3.38%

Earnings Reaction

5.44%

-3.3%

-0.43%

-5.85%

Walgreen has seen decreasing earnings and revenue figures over the last four quarters. From these figures, the markets have generally been disappointed with Walgreen’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Walgreen

CVS Caremark

Rite Aid

Wal-Mart

Sector

Year-to-Date Return

31.07%

18.22%

62.87%

14.92%

9.79%

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

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Conclusion

Walgreen provides essential products and services in quick and convenient methods to consumers across the United States. The stock saw a monster run in the late 1990s but has since been stuck in a range. However, Walgreen stock is trading at the top end of its multi-year range so a break higher would be very positive. Earnings and revenue figures have been declining but a recent rise has sparked excitement among investors. Relative to its peers and sector, Walgreen has been one of the performance leaders, year-to-date. Look for Walgreen to OUTPERFORM.

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