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Growth at reasonable price, long-term horizon, dividend investing, research analyst
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Summary

  • On August 6, 2014, WAG announced that they would be exercising their option to complete the purchase of Alliance Boots.
  • While heavily pressured by Institutional Investors, WAG chose not to incorporate a Tax-Inversion into this transaction.
  • This Dip in price presents a very favorable entry point that savvy long-term investors might not see again.

I have to admit--I love watching Jim Cramer. I find his show to be thought provoking, motivational and educational almost all the time. There are segments I like better than others; I almost always skip CEO interviews unless it is one of the few CEO's I already like. Just like most anything else, my taste varies compared probably to many of you, so the virtues of Mad Money can be touted or denied I am sure with much vigor on both sides. In any case, I am very much my father's son, and one of those things I discovered I mirror his taste in is this: We both watch Cramer, but we never follow his advice (on a particular stock).

Well, I should not say never, at least in my case. Twice in late 2011 I more or less followed a Cramer "Buy, Buy, Buy!", and the one we are going to look at today turned into a really good investment (over time). On September 27, 2011, I bought a stake into Walgreen Co. (NYSE:WAG) after having seen a CEO interview with Gregory Wasson, which took place in the Manhattan Flag ship store, with Mr. Wasson highlighting the many innovations that were being tried there for roll-out to the rest of Walgreens stores over time. I am typically uninterested in the Retail sector, nor do I find myself to be a particularly loyal customer of Walgreens (there is a CVS much nearer to where I live), so this was a flier of fliers.

And it appeared as such for well over a year--it did not take long for buyers remorse to set in. I realized soon after that I did not like mixing my investing with my hobby of watching Cramer because it made me feel like betting on my favorite football team and getting mad at them when they lost. But I hung in on the trade anyways (even Cramer said this was a long-term thesis), and after the turn of 2011 New Year when I was looking at my portfolio rebalancing with the new tool in my bag of using the PEG ratio as a valuation metric, WAG still passed my screen and I more or less relegated it to back-burner interest. Unlike a lot of things I am invested in, or watching in passing interest, WAG does not engender a lot of constant media. Maybe once a quarter Wasson shows up on Mad Money, but again, I usually do not watch the CEO interviews anyways, so these are of little consequence to me.

Looking at the long-term chart for WAG though, we can see something happened in December, 2012, as a catalyst that has taken the stock up almost like a rocket since. As Nick Chiu said following the December 21, 2012 Q1, 2013 Earnings, "Disappointing numbers, but Walgreen is turning around". The secret was most definitely baked into this earnings report, and as Sarfaraz A. Khan adeptly pointed out, the one quarter lag that WAG had adopted had concealed the gains from the massive acquisition of Alliance Boots because they were not yet reflected in that earnings release.

Since that time until today, August 6, 2014, WAG has been trending almost entirely upward with very few serious pullbacks, and certainly none like today's drop on the news of the decision not to seek a tax inversion along with the purchase of the 55% of Alliance Boots they did not already own. Tax inversion had been sought by a number of the institutional shareholders including Jana Partners LLC but ultimately the Board decided that they could not guarantee that a protracted struggle with the IRS would not ensue in today's political environment. President Obama has called tax inversions "wrong" and the IRS has signaled that they will be seeking to end the practice, or at least highly scrutinize all future ones. Wisely, Wasson and the Board decided they did not want to be that test case.

Putting WAG on my screen now, there are several areas of continued strength despite a more than 16% loss today. The PEG ratio is a healthy 1.54 and percentage below the 52 week high is almost -23%, giving a great deal of inferred run room for deep value investors. The dividend yield has been a great sufferer of WAG's two year run of success, hovering at 1.82%, which is certainly not ideal for an income investor looking for dividend yield. The Analyst Consensus Target Price is $77.74, which is just a bit higher than the 52 week high, and the Consensus Mean Recommendation Score is 2.20--assuming this is not changed dramatically after today's session. While the big institutional shareholders are going to rue the loss of the possible $4billion in taxes WAG was expected to save over the next 5 years, today's price drop does give the swift footed small investor time to take advantage of this drop to initiate a new position with WAG or add to an existing one at a price not seen recently. I expect to see a bounce within a day or two, or worst case scenario, a gradual drive back to $70 or higher very soon.

Source: Buy This Walgreen Dip, Thank Me Later