Walgreen: A Superior Defensive Play

Look for Walgreen's revenue to rise about 6-8% in 2010, boosted by the addition of about 300 net new store openings. Front-store traffic trends in their more than 7,000-store chain are improving, and back-store (pharmacy) margins should benefit from increased sales of higher-margin generic drugs.

Another positive: in February, Walgreen acquired New York City drug chain Duane Reade for about $1.1 billion in cash. The First Call FY2010/FY2011 EPS estimates for WAG are $2.29 to $2.70.

Technically, Walgreen's stock overcorrected after pushing through $40 in the fall 2009, and has formed a bear hug -- a bearish pattern. Typically, each would be a concern, but the calculation here is that WAG will hold support at/near $32.

2010 Outlook: I view Walgreen as a long-term play, but if investors are looking to sell WAG within the year, it's probably best to take your profits after it rises to $38-40, if it fails to clear $41.

Stock Analysis: I consider Walgreen to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 50% position in WAG now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 75% of my WAG position before April 2010 and I'd put a sell/stop loss at: $17.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.