No Compelling Reason to Own Walgreen

 | Jun 28, 2013 | 1:00 AM EDT
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After the big declines of last week, the market has had since Tuesday one of best three-day runs of 2013. One stock that has not participated in the rally and has actually sold off during that period is drugstore retailer Walgreen (WAG). The stock has lost some 8% of its value this week in the midst of this huge rally.

The core reason Walgreen had a tough week is that it reported earnings this week that missed on the top and the bottom line. Earnings per share came in at 85 cents, five cents below estimates. Revenues were also approximately $140 million light. One disturbing tidbit within earnings was that the chain's front-end sales dropped nearly 4% during the quarter. The drop in this traffic has also been seen at competitors Rite Aid (RAD) and CVS Caremark (CVS). The other driver of the stock's decline this week was a prescient downgrade of the shares the day before its earnings report by Cantor Fitzgerald.

I was a one-time bull on Walgreen and owned and advocated for the shares in May of last year when they were trading in the low $30's. I took profits earlier this year when the stock was trading at about its current level of $45 a share. The problem with Walgreen now is that I don't see a lot of compelling reasons to own it at these levels even after its decline this week.

With a yield of 2.3%, it does not meet my consideration criteria for my income portfolio. With revenues expected to grow by one percent this year and just over four percent in FY2014, it hardly qualifies as a growth stock.

At over 14x this year's projected earnings it does not meet my criteria of a value stock. I can get a higher dividend yield, much faster growth and at a significantly lower multiple by owning something like Microsoft (MSFT).

The other reason I don't like Walgreen at this point is that it is part of safe defensive area of the market along with the likes of Procter & Gamble (PG) that did so well during the first four months of the year. These stocks have fallen out of favor, however, over the last six weeks and have underperformed the overall market. I see this trend continuing for the rest of the year.

I like Walgreen as a company but can find no compelling reason to want to own the stock at these price levels. If the shares fall to under $40 a share, I would take another look at them.

At this time I would rather own something like American Realty Capital Properties (ARCP). This single tenant retail REIT is down around 15% from its recent highs on the back up in interest rates. It rents approximately 8% of its overall space to Walgreen, yields 6.3% and has other compelling reasons to have it within an income portfolio .

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