Monday, October 1, 2007

who said drugstore stocks were boring...

I'm always a sucker for a good sale. There was a 'SAVE 15%' sale on today the leading U.S. drugstore chain, as Walgreen Co. (WAG) shares were knocked flat on their back when the company announced a 3.8% decrease in 4th quarter earnings. I could not resist the opportunity to double my position within my non-registered portfolio.

Of course I think this is a huge buying opportunity, since even if earnings growth falters in the short term I still believe earnings growth will continue to be double digits long term which will grow my investment nicely. People will continue to choose drugstores over big box stores for their medication and related goods because of location, convenience, and service. Boomers will cause the industry to grow, and although there is strong competition Walgreens is positioned nicely in most markets already.

Reasons for the earnings drop were stated as follows:

"due in part to lower reimbursements on some popular generic drugs and higher expenses (increased store and staff costs)."

This was Walgreen's first year over year profit drop in over a decade. People are speculating that the generic drug problems are partly due to Wal-Mart's new initiative to offer generics at $4. This is sending the entire industry down today as CVS and Rite Aid are down 5% and 4% respectively as of writing this. Walgreen Co. earnings for the total year (2007) were up 16.6%, and sales grew 13.4%.

Not for the faint of heart, I guess, but it is mornings like this where I have to ask myself, 'What has changed?". Is this company instantly worth 15% less today than it was on Friday, or could this be a bit of an overreaction? This was certainly unexpected, and disappointing for Walgreen shareholders, but should I be disappointed as a very long-term investor? I think the answer is no, and on the contrary I should be happy to be able to pick up these shares at such low levels. Combine today's low levels with the current value of the Canadian dollar and maybe, just maybe this could be one of those very rare 'once in a lifetime' opportunities.

As of writing this the shares are still flat on their back at $40.34 down about 15% from Friday's close. This is a company has had such great success and consistency in earnings growth in the past that I believe high expectations were built up in the market. With high expectations comes significant disappointment when stumbles happen. I think that is what were are seeing today.

When a 50 Billion dollar, boring, blue-chip consumer staple stock falls 15% in one day it shows you that anything can happen in the stock market.

I promise this will be my last post, which refers to Walgreen Co. for at least six months...consumer staple stocks are boring...

8 comments:

FourPillars said...

It's important to write about topics that you care about - so don't apologize for writing about Walgreen. In fact I suggest you write about it once a week if you want...

Mike

telly said...

Personally, I rather enjoy your obsession with WAG. :)

I index 98% of my US holdings but you're really beginning to sway me to add one more stock to that list (the only other is JNJ)...

FourPillars said...

Yah, I'm kind of tempted to buy it too. However I don't want to buy a lot of it so I'm not sure if it's worthwhile.

Mike

t h rive said...

they don't divvy out a huge dividend - like say McDs...but cause of your obsession with them I may be adding them to my next RSP DIvidend Portfolio. They're sitting at a good $39 a share now...unfortunately I cannot purchase until January or so.

jnirvana said...

One quick questions to those who buy indvidual stocks. Once you decide (based on whatever your decision making process is about a stock)

1) What is your buying process?
Do you buy $1000 or $2000 at a time. How do you keep your borkerage fee down?
2)At what point you double? 10% correct?
3) How much correction do you allow before taking your money out.

Anonymous said...

Personally, I've been dating whether to pick up some shares on Walgreens or CVS. I picked up some shares of CVS yesterday (with my fingers crossed that the drugstore industry will not go down the drain in the next while). Please continue your posts on WAG, as I may decide to pick some up if the price drops some more. It went down to $38 or so today!

MG said...

4P, thanks for the emotional support. Sometimes I think I need to better control my short-term view of things...

jnirvana, everyone's process and strategy is different and there is not a right or wrong answer to those questions. I usually try to keep my brokerage fees well under 2% of the purchase price. For me to 'take my money' out of a company the business or the company would have to fundamentally change in a way that would make my initial investment thesis not make sense. I have only ever sold our of one stock.

Thanks all for the encouragement regarding my WAG addiction..perhaps I will reconsider my moratorium on WAG posts....these past few days have just been so damn dramatic for WAG...

Anonymous said...

Now that the stock is even lower at $38 a share, it is an even greater oppertunity to buy or should it be considered to sell and cut your loss?