Why Walgreen Is Suddenly On Fire

Apr.19.12 | About: Walgreens Boots (WBA)

Walgreen (WAG) has been one of the laggards in my portfolio over the past six months even as the overall market has seen a huge rally. However, over the past five trading sessions the stock has been on fire (See Chart). Given the company's low valuations and stable prospects, I expect this outperformance to continue.

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Key Recent Events For Walgreen.

  • It was added to the "Most Preferred" list at UBS this week.
  • It crossed over its 200 day moving average on Tuesday. This is first time this has occurred since last summer.
  • It announced it is hiking its quarterly dividend by over 28% last week.
  • Now that the Medco merger has been approved, speculation is increasing that Walgreen will be able to hammer out a new contract with Express Scripts (NASDAQ:ESRX). This would remove a huge overhang on Walgreen's stock.

4 additional reasons Walgreen represents value at just over $35 a share:

  • The company has a solid balance sheet, stable cash flow and now yields 2.6%.
  • The stock has a forward PE of just over 12 which is an approximate 20% discount to its historical average.
  • The stock is cheap at about 40% of annual revenues and 9 times operating cash flow.
  • The stock has built a technical bottom at around $32 and has vastly underperformed the S&P over the prior six months (See Chart). I would look for this divergence to reverse and shrink over the next six months as this defensive stock should easily outperform the market if we hit increased turbulence from Europe; which I expect before summer.

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Disclosure: I am long WAG.