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Prescription For Success

Date: May 18, 2009 
Company: Walgreen
Ticker: WAG
Price: $30.70
Opinion: Bearish (short-term) / Bullish (long-term

Comments: After soaring nearly 50% since bottoming in March, Walgreen's shares have spent the past month or so tracing out what closely resembles a head and shoulders top. While a well-formed double bottom pattern between November 2008 and March 2009 gives us cause to like the shares longer-term, in the short-term, we believe the stock is over-extended to the upside and due for a rest over the next few months. The potential head and shoulders top which is illustrated on the attached chart, indicates that the shares could likely give back half their recent gains before resuming their upward trek.

Over the past five years, revenues have grown 12.7% per annum. And this year, sales are projected to jump another 7.3% to $63.3 billion, with same-store-sales rising approximately 2%. While the recent economic downturn nearly destroyed corporate America, 100-year old Walgreen Co. has continued to fuel its growth by opening several hundred new stores and expanding operating hours.

With that in mind, we suggest a few possible courses of action: You could sit on the sidelines and wait for a pullback to $25 and then buy all the shares you can get your hands on. Another possibility would be to short-sell the shares at the current level in anticipation of repurchasing those shares at a lower price next month. Or you could purchase July 30 put options (Ticker: WAGSF) at their current asking price of $1.35. If WAG falls to $25, those options would be worth $5.00, which would translate to a 270% gain.

If this stock declines to $25 as projected, don't expect it to stay there for long, so use that opportunity to convert short positions to long ones.