2 Large-Cap Losers From Yesterday and What to Expect Now

Walgreen (WAG) and Carnival Corporation (CCL) were the two major large-cap losers on Tuesday. Here are some of the specifics about these stocks and what to expect from them going forward.

Walgreen fell 6.6% on Tuesday. Walgreen reported better than expected Q2 results; however, gross margins fell short of what many analysts had estimated. I believe the gross margin miss was more due to a mismatch in analyst expectations than a fundamental business issue. After two consecutive quarters with 80 to 90 basis points of Y-o-Y FIFO gross margin improvement, some analysts and investors were expecting stronger results. However, Walgreen had significantly tougher comps in the February quarter, which led to the miss. Investors were also concerned about how inflation is affecting Walgreen’s front-end margins. However, one should note that drugstores arguably have the most pricing power in retail and are usually least affected by inflation.

The long-term trend is still headed in the right direction, as the company continues to deliver on its $1B cost-cutting program, which along with fewer store openings and the record 2012 generic wave should help gross profit dollar growth exceed SG&A growth, driving margin expansion over the next few years. After yesterday’s correction, the stock is trading at ~13x consensus FY12 EPS of $3.01 as compared to its historical average of 15x-17x. Investors should initiate a long position on this dip.

Carnival Corporation fell 4.5% on Tuesday. CCL reported 1Q EPS of $0.19, in line with previously announced guidance. CCL modestly raised 2011 EPS guidance to $2.55-2.65 (vs. previously pre-announced guidance of $2.50-2.60 and the consensus estimate of $2.77) due to changes in spot fuel prices and currency.

While CCL’s bookings and prices appear to be going in the right direction, there had been some weakness in the southern European-sourced brands Costa and Iberocruises. This weakness can mainly be attributed to the recent unrest in the MENA region. Although CCL management has taken the proper steps to mitigate the financial impact from the MENA region, I remain concerned about the MENA turmoil and higher energy prices. I will wait for some more clarity on these issues before becoming positive on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.