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.

Walgreen Friday posted first quarter EPS of 46 cents, 2 cents above the Reuters consensus estimate, on solid sales and effective cost controls, the company announced Friday. Walgreen (NYSE: WAG) shares surged on the news, gaining $2.69 to $38.94 in mid-day Friday trading.

Meanwhile, Q1 same-store sales increased 5.4%, Walgreen said, including a 4.6% "front store" revenue gain and a 5.9% "back store" gain, which includes pharmacy revenue.

Revenue in Q1 increased by 10.4% to $14.03 billion versus the Reuters consensus estimate of $14.10 billion.

"We brought stronger expense discipline into play across the company, while making investments that will build and enhance our competitive position," Walgreen CEO Jeffrey A. Rein said in the press release. "Our store managers and corporate folks did an excellent job of controlling expenses this quarter. We also improved advertising efficiencies while maintaining our weekly sales promotions at a comparable level."

It peeves me just a little bit that in spite of some significant moves, there seems to be a lack of positive press for Kroger Co. (NYSE: KR). Oh, they received a good bit of spin out of their move to sign on to a series of directives promoting "best practices" for keeping tobacco out of the hands of minors, but those headlines were garnered in the interest of ivory tower politicos fanning their own egos, not in true recognition of Kroger itself.

What really gets me miffed though, is that the introduction of a $4 generic drug program at 76 of Kroger's pharmacies went virtually unnoticed by all except possibly a few hardcore AP writers who, after all, are responsible to report on just about everything.

So in the interest of "broad coverage," I now give you the link to the story at RetailingToday.com (registration required). I think the quip there provides a good, quick revelation regarding Kroger's generic drug efforts and it also makes a nice comparison between where Kroger is headed in the pharmaceutical business and how Wal-Mart (NYSE: WMT) is faring so far in that regard. We might note at this time that Wal-Mart has initiated a second price tier in its discount drug program.

Of additional interest in the Kroger camp was the recent indication by Jim Cramer that Kroger could be moving as high as $36. I won't disagree with that. Note that KR ended trading on 10-26-07 at $28.68, and was headed downward. Amid an overall positive attitude about the company, I believe that this puppy has room to run!

Walgreen (NYSE:WAG) and Rite Aid (NYSERAD) both turned in excellent results for the last quarter. Part of the message sent by both companies is that Wal-Mart Stores, Inc. (NYSE:WMT) $4 generic drug program is not hurting them. But Wal-Mart said its November pharmacy sales were up sharply.

Some part of this does not make sense. Some analysts say that the Wal-Mart drug buyers as consumers without insurance who were not going to any store while the mainstream pharmacies cater to patients who are insured. Rite Aid and its large competitors keep more generic drugs stocked in its stores, and their prices are not very different from Wal-Mart's.

If there is a surge in the purchase of generic drugs that is fueling growth at both Wal-Mart and Walgreen, that would be a problem to Big Pharma companies whose patent drug sales are being eroded by generics already.

Again, that answer would be too simple. Some data still appears to be missing.

While the mystery of both Wal-Mart and Walgreen both doing well is still open, one piece of data does appear to be clear. CostCo took a shot at $4 generics and lost money. They moved the price point to $10.

Lost money? Can Wal-Mart be making any at $4? If not, one of Wal-Mart's biggest initiatives could be a bust.

Douglas A. McIntyre is a partner at 24/7 Wall Street.