Walgreen’s dropped its plans for a potential tax inversion last week, and investors were quite disappointed judging by the huge gap lower on Thursday morning:
The gap below the 200 day moving average was WAG’s first move below the 200 day ma since November 2012. That nearly 2 year streak was very impressive as the 200 day ma has been steadily rising the entire time. Even the 50 day moving average has hardly declined throughout the entire period, and today remains well above the 200 day moving average.
Even with the recent selloff, WAG remains up 8% year-to-date, a testament to the extent of the gains in the stock in the first half of 2014. The stock’s intraday low last week was $57.75, and the $55 level is intermediate term support that I would expect to hold on any further weakness. However, when a long, clean uptrend like WAG’s is broken on a large volume gap, the stock generally takes time to heal as the trend followers unload their shares and new buyers take their place.
On the upside, the $65 level is likely to be resistance, as that’s the level of the 200 day moving average. So the $55-$65 range looks likely to persist for some time. What about options prices? Well, since WAG earnings and the Alliance Boots acquisition are both out of the way (and the inversion uncertainty), 30 day implied volatility has come down in the past month, though it is still higher than most of the past 2 years:
On a fundamental basis, WAG looks relatively cheap, priced at around 18x P/E with earnings growth of 17% expected for next year. Of course, Walgreens has seen some sales volatility in the past few years, so the expected numbers are no gimme. While management is stellar, it also has to deal with fully integrating Alliance Boots in the coming months.
Looking at trades, the Sept20th 65/60/55 put butterfly is priced around $1.85, is only an okay risk/reward, in my view, considering the recent volatility in the stock. The Sept 55/65 strangle is only around $1.00, so the wings are not really worth selling on their own either. With that in mind, this is probably a situation where we will just keep it on the watch list and maybe look for a long side trade if the stock sells off to $55.