A new Walgreen Company (NYSE:WAG - 30.10) branch opened earlier this year in the heart of Chicago's State Street shopping district. There are a sushi chef and a barista on duty, a smoothie bar, and consumers can stock up on both wine (the store boasts about 400 selections) and high-end cosmetics. My Peter-Lynch senses found this an odd choice for the pharmaceutical retailer – who is planning a second high-end location – and I wondered what was going on with the company behind this retailing shift. Turns out, the stock is down more than 31% in the past 52 weeks.
What's more, WAG has underperformed the S&P 500 Index (SPX) by almost 12 percentage points in the past three months. After spending nine months in a sideways range capped by $36 to the upside and $32 to the downside, WAG turned lower in early May and has actually dropped more than 9.5% in the last three months alone. Currently, the stock is wrestling with its 40-day moving average, which rebuffed the stock's last rally attempt in mid-June.
We are seeing a fair amount of complacency on WAG despite the stock's technical challenges. In the option pits, call activity has been notable; the call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) weighs in at 3.42. In the past 2-1/2 months, therefore, 342 calls have been bought to open for every 100 puts as speculative traders try to call a bottom in the shares. This ratio is actually higher than 82% of the past year's data, signifying that call-buying activity is heavier than normal.
Another sign the Street is sanguine on WAG is evident from the short-interest picture. The number of WAG shares sold short dropped by nearly 12% in the last reporting period. At the stock's average daily volume, it would take fewer than two trading days to cover all of these positions, practically eliminating the chance for any short-covering support.
While Wall Street isn't exactly sounding the bullish horn on WAG, the group isn't collectively cautious, either. Of the 19 analysts following the stock, eight maintain a "strong buy" rating on the downtrending shares, while one other provides a regular "buy" recommendation, leaving seven "holds" and three "sells" or worse. According to Thomson Reuters, the average 12-month price target for WAG is $35.36, representing a move higher of about 17.5% from current levels. Any downgrades or estimate reductions could spur some short-term selling pressure in the shares.
Bearish investors who think WAG has limited upside potential through the intermediate term could consider an in-the-money put, such as the October 34- or 35-strike put. Note that two events take place during these options' lifetime – earnings in late September and the company's ex-dividend date on August 15.
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