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Walgreens’ Rx: A dose of buyout talk

A Walgreens CVS drugstore are seen adjacent corners an intersectiCalumet City (AP Photo/M. Spencer Green)

A Walgreens and CVS drugstore are seen on adjacent corners at an intersection in Calumet City (AP Photo/M. Spencer Green)

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David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday

Updated: March 1, 2012 12:29PM

To the average Chicagoan, the drugstore chains Walgreen (WAG) and CVS Caremark (CVS) could be clones. The stores have similar layouts and merchandise. Even the color schemes look alike.

And in their core markets, they both are determined to make their stores unavoidable. They provide saturation coverage, sometimes across the street from each other.

But their business strategies have diverged. And lately, so have their stock prices, the comparison being unfavorable to the hometown contender, Deerfield-based Walgreen.

CVS merged with pharmacy benefits manager Caremark to get a lock on its prescription volume. Walgreen fumbled its own venture into that line, then terminated its deal with another PBM, Express Scripts (ESRX). Walgreens’ focus is on boosting drug sales online.

ESRX is awaiting regulatory approval of a merger with Medco (MHS). If it goes through, it could vastly increase the negotiating clout of drug benefits managers at the expense of the pharmacies that contract to fill their orders.

So the pharmacies, some argue, need to get bigger too. Morningstar analyst Matthew Coffina caused some Internet chatter with an article in which he argued that CVS should buy Walgreen. He said they are better off together regardless of whether the relationship between health-care payers and providers remains frosty or thaws.

“We see both firms as motivated to do a deal,” Coffina said. He has an interesting case, as CVS’ Caremark unit has its own worries from an Express Scripts-Medco merger.

But CVS and Walgreen together would be far larger than the nearest competitor. Regulators, egged on by the likes of Wal-Mart Stores (WMT), are likely to object. Also, Walgreen has expressed a determination to stay independent.

Walgreen has paid for its missteps. The stock is down about 17 percent over the last five years while CVS has risen 36 percent.

If all else fails, deal speculation could fix what ails Walgreen shares.

ONE TO GROW ON: Analysts at William Blair & Co. can be excused if they were just thinking spring. But three of them attended an “impress the analysts” day at Scotts Miracle-Gro (SMG) and came away excited about a company they had already tagged with a bullish “outperform” rating.

The Blair team found credible a Scotts plan to nearly double earnings over the next five years. It’s possible, the analysts said, because of new products, expansion in China and more intensive advertising across all brands.

THREE TO SHUN: Financial editor Jeff Reeves, writing at, has found three tech stocks he thinks are overvalued. One or two of the names might surprise you.

They are Amazon (AMZN), Salesforce (CRM) and LinkedIn (LNKD).

Amazon’s shares trade at about 130 times last year’s earnings, which Reeves aptly described as “nosebleed” territory. Investors treat it as a stock with explosive growth potential, even though its profit margins have declined and revenue increases have tailed off. Amazon’s latest woe is its Kindle Fire, which it currently sells for less than production costs — not a good sign.

It’s a similar situation with Salesforce — growth that’s more in the eye of the beholder than in reality. LinkedIn benefited from a “Facebook bump” that followed the social media site’s IPO registration, but has struggled to eke out profits.

VOLATILITY MATTERS: The Chicago Board Options Exchange released a study it commissioned that showed consistent appeal, as measured over 25 years, of various options strategies for index investors. The study by Asset Consulting Group showed the strategies can boost returns by reducing volatility.

Among the strategies reviewed was the CBOE S&P 500 BuyWrite Index (BXM), which calls for selling covered calls against the S&P 500 stocks. It generated an average premium of 1.8 percent per month, pretty good anytime but especially when interest rates are low. See the study at

THANKS FOR SMOKING: International stock funds were among the most battered sectors of the market last year. However, Morningstar analyst Gregg Wolper observed that the funds that performed the best in that category had healthy — excuse the term — allotments of tobacco stocks.

Some managers of overseas funds have seized upon tobacco stocks for their huge cash flows and their reduced exposure to litigation risk outside the United States. A prime example is Tweedy, Browne Global Value (TBGVX), which last reported 6 percent of its holdings as being in two tobacco producers, Philip Morris (PM) and British American Tobacco (BTI).

Wolper said the Wintergreen (WGRNX) fund has 9 percent of its holdings in those two companies.

Investors are playing a game of regulatory arbitrage. As long as other countries go easy on smoking, the industry is poised to be a profit standout.

You’ve heard of value investing? This smacks of no-values investing.

CLOSING QUOTE: “Only in the stock market does the best merchandise occasionally sell cheaper than the lower-grade merchandise.” — from Chicago-based Kovitz Investment Group’s winter 2012 newsletter

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