- The Washington Times - Tuesday, May 30, 2006

Chain seen outperforming sector

Q I am a longtime investor in Walgreen Co., but the stock hasn’t done well lately. What is the outlook for the company?

A: The stock of this ever-expanding, highly efficient drugstore chain has long been a reliable prescription for investors seeking quality and growth in their portfolios.

Walgreen has been a leader in prime location selection, pharmacy computerization, 24-hour stores, drive-through windows and pharmacy-benefit management. Its photo division is profiting from a service that lets customers order digital photos over the Internet and pick them up at the store in an hour.

Aging baby boomers, the expanded Medicare drug benefit and a rise in generic drugs are positives for the firm. This summer, Walgreen plans to open in-store health clinics staffed by certified nurse practitioners in stores in Missouri.

The nation’s top drugstore in sales, Walgreen has more than 5,000 outlets in 45 states and Puerto Rico. It plans to open 475 new ones this fiscal year, with a goal of exceeding 7,000 stores by 2010.

Earnings increased 7 percent in its recent quarter despite the negative financial impact of a mild flu season. In the executive suite, Jeffrey Rein, a longtime Walgreen employee and current president, becomes chief executive in mid-July. David Bernauer, CEO since 2002, continues as chairman.

Yet the problem with such long-term success is that it raises expectations.

Because it has traditionally traded at a premium, Walgreen stock is susceptible to concerns about sales or earnings. Drugstores are a competitive business; there is a nationwide shortage of pharmacists; and potential Medicare-related legislative change is always a worry.

Walgreen stock is down 6 percent this year, following gains of 15 percent last year, 5 percent in 2004 and 25 percent in 2003.

Aggressive rival CVS Corp. has more stores, many gained through acquisitions, although its revenue remains less than that of Walgreen. CVS shares sell at a lower price multiple and have received Wall Street attention as the firm works to correct past mistakes.

The consensus Wall Street rating of Walgreen stock is a “buy,” according to Thomson Financial, consisting of eight “strong buys,” seven “buys” and seven “holds.”

Earnings are expected to rise 13 percent this year, versus 10 percent forecast for the drugstore industry. Next year’s expected 17 percent rise compares with 15 percent predicted industrywide. The five-year annualized growth rate is projected to be 16 percent versus 13 percent for its peers.

The more volatile CVS shares receive a similar consensus “buy” recommendation of seven “strong buys,” seven “buys” and five “holds.”

Q: I’m considering Van Kampen Comstock Fund. Is this a good investment?

A: Because it takes a contrarian approach and often owns stocks from industries undergoing fundamental change, bravery is required of its investors.

Expect volatility and realize that time is required for some of its stocks and concentrations to show significant results. For example, it has hefty stakes in health care, media and telecommunications but little in energy.

If you have the fortitude to handle all that, it does have promise because its returns over time have exceeded those of other large-value funds.

The $12 billion Van Kampen Comstock Fund is up 9 percent over the past 12 months, which ranks in the bottom one-third of large-value funds. Its three-year annualized return of 16 percent places it in the upper one-third of its peers.

“I have a favorable impression of this fund because it has been a solid performer over time and its experienced senior portfolio manager, Bob Baker, has been there since 1994,” said Terence Geenty, analyst with Morningstar Inc. in Chicago. “It is a little less correlated to the Standard & Poor’s 500 than the typical large-value fund, so it could make sense for an individual whose personal portfolio is focused on that index.”

Mr. Baker is assisted by co-managers Jason Leder and Kevin Holt, who have been with the fund since 1995 and 1999, respectively. They take advantage of troubled situations to buy beaten-down stocks. Cash flow and underlying assets are studied carefully. To spread risk, the fund has more than 100 stock names and caps holdings at 5 percent of assets.

Twenty-eight percent of Van Kampen Comstock Fund assets are in financial services, with health care, industrial materials, media and telecommunications other major concentrations. Top holdings are GlaxoSmithKline, AT&T;, International Paper, Freddie Mac, Verizon Communications, Citigroup, Bristol-Myers Squibb, Bank of America, Sprint Nextel and Alcoa.

This 5.75 percent “load” (sales charge) fund requires a $1,000 minimum initial investment. Annual expense ratio is a reasonable 0.80 percent.

Q: How do I know if I should invest in a taxable or a tax-free money-market fund?

A: Individuals in higher tax brackets benefit the most from tax-free money-market funds.

Compare a taxable yield with a tax-free yield in your individual federal tax bracket before investing. To do so, take the tax-free yield and divide it by one minus your tax bracket to come up with its taxable equivalent.

For example, let’s say a taxable fund offers 4.25 percent and a tax-free fund 3 percent. If your federal tax bracket is 28 percent, one minus 0.28 equals 0.72. After you do the math, you would find the taxable equivalent of the 3 percent tax-free fund is 4.17 percent for you, making the taxable fund a slightly better deal at 4.25 percent.

“A couple of years ago, cash was trash, but now cash is king thanks to rising interest rates,” noted Greg McBride, financial analyst with Bankrate.com. “Besides taxable versus tax-free and the fact some funds are also free of state tax, the biggest differences in money-market yields come from the expense ratios of the funds and whether the manager has extended or reduced the average maturity of securities in the fund.”

cWrite to Andrew Leckey at [email protected]aol.com.


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