This thinking contrasts that of the analysts at UBS, who said that despite the stock’s strong performance year to date and throughout 2012 it is a buy. Prior to yesterday’s pop Walgreen had been trading off of its 2013 highs, which led UBS to declare that now is an excellent buying time. The rationale behind the upgrade was that the Alliance Boots transaction has settled and will begin positively impacting Walgreen’s revenue and EPS. UBS also expects Walgreen’s increased presence of generic drugs in its stores to boost its gross margins in 2013. Additionally the upgrade cited Walgreen’s carefully constructed loyalty program and healthcare overhaul and coverage expansions as further reasons for stock appreciation the rest of the year.
The bearish case for the stock is that it is fully valued here at a 19.2 P/E and a price/book of 2.2, which is about in line with the broader market but above the industry average. Having gains 17% in the last three months this option trader is betting that the stock is due for at least a period of consolidation, if not a moderate correction. The Dow has been up 9 days in a row and eventually this will have to end. When the market dips Walgreens is likely to get dragged down with it. In the event that Walgreens continues its rally this trade will cap its losses quickly because the spread is only a dollar wide. It can be very difficult to pick a market top, so if you are tight spreads with good risk/reward ratios are the way to go.