Walgreen Co. (NYSE: WAG) took a nearly 8% dive yesterday, but this drug store retailer may bounce back big-time across the next several weeks. Here are five reasons investors should consider Walgreen stock a buy:
Walgreen Earnings Weren’t Bad: WAG stock was pounded because Walgreen same-store sales and gross margin fell short of some analysts’ estimates. But profit was up 10% on prescription growth and revenue was up 9% year-over-year. A nearly 8% sell-off is pretty harsh on those numbers. Walgreen’s fiscal second-quarter same-store sales rose 4.1%, missing the 4.4% increase estimated by some on Wall Street, but again – a small miss on significant growth is nothing to panic over.
I’ll Take 16% Profits Any Day: The mean price target for Walgreen stock, according to the 20 brokers surveyed by Thomson/First call recently, is $45.50 a share. The median target is $46. With shares set to open around $39.30 as of this writing, that’s a roughly 16% upside. If the high target of $52 holds true, you’re looking at 32% gains. And if the worst target of $38 holds true, you’re only out 3%. That’s pretty good risk/reward.
Rite Aid is Dead: Drug store also-ran Rite Aid (NYSE: RAD) hasn’t turned a profit since the first quarter of 2008 and is still leagues away from pre-financial crisis levels. Since March of 2007, Rite Aid is off -82%. Other than CVS Caremark (NYSE: CVS), Walgreen is the only other major drugstore company that is viable in the long-term. That gives Walgreen a competitive edge in the drug store space.
Low Institutional Ownership: With just 65% of shares in the hands of mutual funds and big-time investors, there is a lot of room for Walgreen shares to appreciate as quantitative pressure supports the stock. Consider that CVS enjoys 86% institutional ownership, that many big pharma stocks like Pfizer (NYSE: PFE) enjoy institutional ownership of over 70% and major healthcare stocks like Aetna (NYSE: AET) have institutional ownership as high as 90%. Think WAG is a retail stock more than a care play? Consider Target (NYSE: TGT), which enjoys the same market cap. 90% of TGT stock is owned by the big guys. In short, if institutions start to focus on Walgreen stock the same way you could see some big buying pressure.
No More Benefits: It was recently announced that Walgreens will be exiting the prescription benefits management business. Some think this is a cop-out to the might of CVS Caremark, but on the other hand the divestiture will help Walgreen broaden its pharmacy and health services through store upgrades and further retail expansion. As Rite Aid drifts further towards failure and as WAG looks to expand its retail footprint, this could be perfect timing for the move by freeing up resources to acquire other pharmacies and boost its core business.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks or funds named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.