Should You Imitate the Insider Buying at Walgreen Company (WAG)?

A Form 4 filed with the SEC has disclosed that a corporation connected to Walgreen Company (NYSE:WAG) Board of Directors member Stefano Pessina, who became a billionaire from managing healthcare company Alliance Boots, purchased over 83,000 shares on April 19th at an average price of $48.62 per share. Studies show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). Our explanation for this is that insiders have an incentive to diversify their wealth rather than increase their company-specific risk, and so buying more shares should serve as a vote of confidence in the stock price.

Walgreen Company (NYSE:WAG)’s most recent fiscal quarter ended in February, with the company showing essentially no change in revenue or operating income ex-special items compared to the same period in the previous fiscal year (earnings were up, but this was due to these special items rather than actual improvements in business conditions). Cash flow from operations in the first half of the current fiscal year has been similarly flat. However, Wall Street analysts expect the company’s net income to increase going forward. As a result, the $47 billion market capitalization- which represents a trailing earnings multiple of 22- comes out to only 13 times consensus estimates for the fiscal year ending in August 2014. The stock is up 36% in the last year, possibly linked to the resolution of the drugstore’s dispute with partner Express Scripts Holding Company (NASDAQ:ESRX).

Steven Cohen

We track 13F filings from hedge funds and other notable investors as part of our work developing investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can also use our database of filings to track interest in individual stocks; Walgreen Company (NYSE:WAG), it turns out, made our list of hedge funds’ favorite healthcare stocks in the fourth quarter of 2012 (find more healthcare stocks hedge funds loved). Billionaire Steve Cohen’s SAC Capital Advisors reported a position of 1.2 million shares (see Cohen’s stock picks) while large hedge fund Arrowstreet Capital increased its stake by 63% during Q4 to a total of 2.3 million shares (find Arrowstreet’s favorite stocks).

The closest peers for Walgreen Company (NYSE:WAG) are CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD). The trailing P/Es at these two companies are in the 19-20 range, meaning that Walgreen Company (NYSE:WAG) is priced at only a small premium. CVS experienced growth on both top and bottom lines last year compared to 2011, and the sell-side expects these improvements to continue as its forward earnings multiple is even with Walgreen Company (NYSE:WAG)’s at 13. Rite Aid hasn’t been doing as well- sales have actually been down significantly- and with its stock price rising strongly in its last year it is now at the point where it looks like a less interesting value investment. It is also much smaller than CVS or Walgreen Company (NYSE:WAG) in terms of market capitalization.

Wal-Mart (NYSE:WMT) has also been moving into the pharmacy business, and we can also compare Walgreen to Express Scripts as a related company. Wal-Mart had decent numbers in its last quarterly financials, but reports have suggested that the discount retailer is doing much worse in the current fiscal quarter. Analyst consensus has it with a forward P/E of 13 as well. Express Scripts is actually priced lower than level if you either annualize its most recent quarter or look at earnings estimates for 2014. Operations seem to have returned to normal and it might be a value play.

This insider purchase is interesting, and may be worth remembering as the drug stores report their results, but at this time Walgreen doesn’t seem to have been doing too well in terms of its business when we consider where the stock is trading. Express Scripts seems like a more interesting company for value investors to research further.

Disclosure: I own no shares of any stocks mentioned in this article.