My Walgreen Mistake - What Went Wrong?

As many readers of the moneygardener know I have a long position in U.S. drugstore chain Walgreen (WAG). I first bought shares in Walgreen on January 29, 2007, over one year ago, when the stock was trading at around $45. In October WAG announced a bad quarter, and investors dumped the shares hard. The day of the dramatic drop I actually doubled my position in the stock to average my cost down. This was a mistake!

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Was this a mistake because Walgreen is a poor company, with a sketchy future? Absolutely not. I still believe shares of Walgreen should be a phenomenal long-term investment. So why was averaging down on the day of that dramatic 15% drop ($47 to $40) a mistake?

It was a mistake, but a mistake I will learn from because:

This trade exhibited my lack of patience, as an investor.

Why I thought I needed to average down so quickly when it announced that weak quarter, is a mystery when one looks back at it now. Yes hindsight is 20/20 but, in reality, I made the trade in fear that WAG would bounce back up to $43 or $44 very quickly, when investors came to their senses. It showed overconfidence on my part. I thought I knew more than the market. No one becomes enamored with a good growth stock, only after it reports flat earnings. In reality, I had months to watch the stock and average down. I've been kicking myself over the past few months as shares of WAG have drifted down to a low of $32.50. I could have gotten them 19% cheaper than my averaged down price, if I could have been more patient.

Why catch a falling knife when you can buy a stock on the rise later?

The interesting fact is that what I thought was such a great deal at a 15% discount at $40/share back in October, has been down to $32.50, and on Thursday had bounced back to go over $37. It is my belief that on Thursday, Walgreen had bottomed. If I would have just waited until all the pessimism was wrung out of the stock, even if I didn't catch the bottom I could have bought it when it was 8% cheaper, and on the rise, instead of reaching for that falling knife.

The good news is that over time, this should all be water under the bridge, as I expect my shares of Walgreen will appreciate smartly over time. I want to try to learn from experiences like this as I continue on my quest to buy great companies that pay growing dividends, at reasonable prices.

Disclosure: The author is long WAG.

Comments

[Anne]

I personally don't think WAG is a good long-term hold because in CA where I live, there are Walgreen, Longs and RiteAid drug stores on every other street corner. They are competing heavily .. not a good sign to me. Also, I have spent up to 2 hours waiting in Walgreen for a prescription to be filled, while the employees talk to drive-up patrons and doctors on the phone and ignore me. I will not be a customer of Walgreen again because of the lack of customer service.

[DaveC]

I would be interested in your take on WAG vs. CVS. I have owned both for a number of years now, but CVS seems to consistently outperform. I agree that the sector is a good long-term investment, but have been thinking of perhaps selling my WAG and buying more CVS.

[moneygardener]

While I've never given CVS a real close look, they seem like a pretty solid company as well. WAG does trump CVS in several fundamental categories, but yet CVS is a more expensive stock currently. I like WAG's consistency and fundamentals better. I'm sure both companies will do very well long term riding the demographics wave...

[cwright2]

In my ex-urb town located in eastern PA, I recently had to go to the pharmacy to fulfill a prescription. I had a choice between CVS, WAG and the pharamcy at the local supermarket. I chose to use the supermarket. I was astonished to find that the local supermarket pharmacy was backlogged for more than 3 hours. I could see over 50 prescription in line ahead of mine. WAG and CVS had virutually no traffic. My guess is that more shoppers are going the mile or so to to save a few dollars on a prescription. I mentioned this to an office worker and was astonished to hear that his wife drive 4 miles out of the way to a Walmart to save 4 dollars on a prescription. Phjarmacy is WAG's bread and butter. I will not touch this stock now. For last 20 years they had the wind at their back, now it is against them. The six figure income set is now fulfilling their prescriptions at supermarkets in a very big way.

[Jack K]

Things are often regional. I live in New Hampshire and can only comment here. I am a physician and we call and Fax Rx all day. Walgreen is not a popular choice up here. Supermarkets are much more popular.

[thelittlebulldog]

I want to thank the author for educating me via some of the mistakes he made. You can learn for successes; but you can also learn from mistakes...maybe even more. I believe I've learned a lesson without making the mistake. I wish more Alpha writers would be more willing to share some of their mistakes.

[User 151630]

Why WAG? CVS is going to continue to gain market with the Caremark PBM and retail chain. Just wait and see.

[Chungst]

Having been a Buy-Side Analysts (BSA) to very demanding (if not unreasonable) PMs, I have to say that you are judging yourself using the WRONG metric, which is the stock price.

The rule I and other BSA use is being right for the right reasons or being right about the market. That is to say, we judge ourselves on stuff that we can control, not on stuff we can't control, such as the stock price (in a similar vein, corporate CEOs should be held accountable the same way). If our analysis did in fact come true, i.e. we were able to predict the company's future performance and HOW the performance manifest itself, that is important not the change in the stock price. Or said different, you get the valuation drivers right, and hopefully the stock price will follow.

So when you wrote: "I still believe shares of Walgreen should be a phenomenal long-term investment," then why are you judging yourself on short term stock movements (i.e. 1 year stock movement) because generally long term would be something like 5 to 10 years into the future.

In summary, the acid test is the quality of your original investment thesis, and not whether you made money or not (separately buying with a significant margin of safety also helps).

Good luck.

[walguy39]

I have bought Walgreen stock for years (starting at $9 each) over the years and have been trying to figure what makes it go up or down. 8 splits and 40 years have passed and I haven't still can't figure it out. When our prifits and the market was up the stock was down. Whlie other stock was down it went up. The only thing is in the long term it has made a lot of people a lot of money and a good retirement income.
Thanks

[tiredofwhinners]

hi, nice to meet you all the great people here. We all learn from our mistakes. It is a wonderful world to make money, you just have to look and have lots of patince. Both WAG and CVS are great companies. People who are runing out of time like ANNE tough luck for them. If you are like her and whinning why things are so bad and late. I feel sorry for you. People like Anne are the root causes of lots of problems in our soceity. They always complain and freebies just something is late, they want free foods and whine and whine. I have solution for Anne, make your own drugs. And if you are not smart enough to make ur own drugs, then get a job where they serve you, like a being a pharmacist or pharmacy tecs or cook or server or teller or fire fighter. Do not whine, thank God there was a place for you to get your drugs so u can get better. Vast majority of the population in this country and the wolrd do not have like what you, ANNE has... so take a deep breathe and live this life instead of whinning and complaining,,