Shares of drugstore giant Walgreen Co. (NYSE: WAG) have been soaring today after topping analyst estimates for its fiscal fourth quarter.

Going into today's earnings report, analysts had been expecting the company to show earnings of 39 cents per share, but the company surprised to the upside by showing earnings for the quarter of 44 cents per share. In reaction to the better than expected earnings, shares of Walgreen have traded up 9% this morning to $37.28, up $3.09.

Yes, you could call this a selective market: select the wrong stock, and there's a 30-40% haircut up ahead; select the correct stock, and you're positioned for the U.S. recovery with modest downside exposure.

Hence, the premium is on defensive plays, and Walgreen (NYSE: WAG) qualifies.

Consider Walgreen 'the defensive's defensive' because not only is it in a conservative sector (drug stores), Walgreen has resisted the urge to grow by acquisition. Instead, WAG has focused on the old-fashioned method of growth by opening new stores, and other methods (large penetrations into new markets, relocating stores, expanding 24-hour service to more stores). The tactic really hasn't hurt WAG's store count, with the chain operating about 6,500 stores in the U.S. as of October 2008.

As drug store chains go, there are few better than CVS Caremark, with the chain taking the CVS name. Further, with the U.S. recession in its 15th month and shares doing their best to form a bottom, now is the time to scoop up CVS's shares, for several reasons.

First, CVS (NYSE: CVS) is a classic defensive stock. During recessions, and especially during this recession, consumers cut back spending, but they do their best to maintain essential purchases, and prescriptions are one such purchase. That bodes well for what analysts call "back store revenue" (the pharmacy).

Continuing with our defensive stock series, with the markets in a choppy/consolidation mode (or perhaps worse), the drug store chain sector has appeal as a defensive strategy. Typically, Walgreen (NYSE: WAG) would fit the bill, but recent results have generated caution signals, and a Don't Buy, pending additional performance statistics.

On Oct. 1, Walgreen reported Q4 EPS of 40 cents, down from 41 cents Q4 a year ago, and 7 cents below the consensus estimate. Wall Street did not respond favorably, taking shares down more than 16% to about $40 from $48 that day. The shares have since deteriorated further, and closed around $38.25 Tuesday.

Prior to this quarter, Walgreen had recorded double-digit earnings growth in six of the last seven quarters, and many analysts had seen F2008 revenue advancing about 10%, including a 5% front store revenue gain. Nevertheless, those projections could not prevent the stock from incurring a large hit -- a sell-off symptomatic of today's market. Miss an EPS consensus estimate in a normal market, and the stock drops 5%. Miss an EPS consensus estimate in the current skittish market, and the Street takes your stock down 10%, or more. Did Wall Street's response constitute an overreaction? Probably.

That last point was reinforced on Monday when Morgan Stanley analyst Mark Wiltamuth raised his rating on the drug store chain to "Overweight," or "Buy," from "Equal-Weight," with a $45 target, arguing the notion that generics will cut deeply into 6,000-store WAG's margins has been overplayed.

[Note: Technical analysis agnostics stop reading here; all others continue.]

Still, technically Walgreen's stock is struggling with near three-year support levels around $38. If WAG fails to hold that support, a drop to the next major support level, $30, is possible. Further, the stock is now substantially below both the 50-day and the 200-day moving averages -- two indicators of stock strength/weakness.

Stock Analysis: Walgreen is a moderate-risk stock not suitable for low-risk investors. Further, the prudent strategy with WAG is Don't Buy, and wait to see if the stock can both hold the $38 support level, and close back above $43 in the quarter ahead. We'll re-evaluate WAG at that time.