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Move Slowly With Walgreen

Robert Weinstein

NEW YORK ( TheStreet) -- Walgreen disappointed shareholders with its latest earnings release, sending shares down more than 5% at the start of trading Tuesday.

Don't rush to buy shares because you think they are at a discount. They're not, but they will be soon. On the surface, it appears the earnings release was successful. The top and bottom lines increased, but not enough to satisfy Wall Street.

WAG Tangible Book Value data by YCharts

Walgreen delivered 85 cents per share in adjusted earnings vs. 72 cents in the same period last year. Investors wanted to see at least 91 cents on the bottom line.

The amounts don't include one-time expenses, which is somewhat ridiculous when you consider how most companies have one-time expenses every quarter. At least in Walgreen's case, during the reported quarter, some expenses were truly one-time, so I'm using the adjusted number as the appropriate benchmark.

For purists (like me), Walgreen's number was 65 cents, or a total of $624 million, up from 62 cents during the corresponding period last year based on fewer shares.

Revenue increased to $18.3 billion but was short of expectations. Investors are liquidating because of lowered full-year profit expectations. Rite Aid responded positively at the open, but within the first half hour of trading was more or less unchanged.

Investors looking for an entry are likely to find waiting two or three days well worth the wait. Walgreen had an impressive run higher, and the trend remains bullish (for now), but earnings-related gaps down almost always take at least two days to work into a new base of support. Aggressive traders can short strength today with a reasonable probability of success (although I don't recommend shorting here).

Short interest is small, less than 2%. Unfortunately for shareholders, when a stock is falling without an ample supply of short-sellers buying to cover, it leaves very few others who want to step in front of a freight train. If the shares continue falling, I will look to enter long late in the trading session on Thursday or early Friday.

I also will look to sell the increased amount of investor fear. Selling fear is a strategy that surprisingly to some, actually lowers my risk also. By selling put options instead of buying the stock outright, I leave myself room for the shares to move before facing a loss.

For example, if late Thursday the shares are trading near $43, I will look to sell the August $40 strike puts for about 90 cents. If Walgreen continues to fall and I receive an exercise notice, my cost basis will be $39.10. If Walgreen's shares remain at more than $40, the most I can make is 90 cents, but that is a return of more than 2% in less than two months. Just as beneficial, investors also have lower risk than an outright buy. Additionally, if the shares sit and trade sideways for a month, as long as they are above $40 on expiration day, this strategy pays off in full.

At the time of publication, Weinstein held no shares of stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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