It’s not often that investors witness a large and stable stock tumble over 10% in a single day. When this happens, it can be a great buying opportunity.

We saw this with the oil refiners, which took a beating, back in June. This proved to be an over-reaction and the major refiners have since outperformed the broader market handsomely.

The market is serving up another huge overreaction. Walgreen Co. (NYSE: WAG) tumbled 13% in a single day earlier this month. Shares are still down 10% since the start of August.

#-ad_banner-#The cause of this huge selloff has been twofold.

One, Walgreen offered fiscal 2016 guidance that was lower than expected.

Two, Walgreen will spend $5.3 billion in cash and stock to buy the remaining 55% of the pharmacy chain, Alliance Boots, that it doesn’t’ already own. In 2012, Walgreen took a 45% stake in Alliance Boots.

Sometimes the market makes a serious mistake.

However, what disappointed investors most was Walgreen’s announcement to not attempt a tax inversion and that it will remain headquartered in the United States. A tax inversion involves buying a foreign company to reduce the firm’s tax burden. Most European countries have a lower corporate tax rate than the United States.

What many investors forget: with tax inversions the company still has to pay the United States’ tax rate on profits generated in the United States.

Digging even deeper, you’ll find that Walgreen’s decision is quite strategic.

A large part of its revenues are derived from government-funded reimbursement programs. Walgreen wants to stay in the good graces of the government, and also avoid potential litigation with the IRS if the government is successful in blocking tax inversions, which is a very hot topic on Capitol Hill.

So, Walgreen, mindful of public opinion, chose to keep its ‘All American’ image. The company also said that the Alliance Boots transaction probably would not have qualified for an inversion.

Revised guidance wasn’t all that bad

Shares are down 18% from their all-time high just a couple months ago. But what’s really changed? Not much. The company remains headquartered in the United States and expects robust growth over the next couple years.  

The selloff in the stock looks to be a case of mismanaged expectations.

Management recently revised fiscal 2016 expectations, which took the market by surprise. Its fiscal 2016 goals now include generating between $126 billion and $130 billion in revenue, versus previous expectations of $130 billion. Earnings before interest and taxes (EBIT) is expected to be $7.2 billion, down 20% from prior guidance.

The EBIT pressure is a result of generic drug price inflation. This is impacting its commercial contracts, which are structured for a falling generic price environment. As Walgreen renegotiates these contracts, margin pressure should be relieved to some degree. Nonetheless, its 2016 EBIT guidance still suggests 60% growth from the EBIT generated over the trailing twelve months.

The initial cost savings from acquiring the rest of Alliance Boots is expected to be far more than $1 billion in the first year. There’s more than $70 billion in product costs and another $20 billion in operating costs that the combined companies will be able to consider cutting.

Overall, although the company revised its 2016 expectations downward, the numbers are still robust. The company, however, did a poor job of managing investor expectations. 

Going beyond the headlines

There’s a lot going on with the Alliance Boots deal that the market hasn’t fully digested.

The move increases Walgreen’s global presence and will lower its cost structure over the long-term. Walgreen is already a leader in the United States pharmacy retail industry, but the addition of Alliance Boots will give it exposure to the European and Asian markets.

Even with the assumption of Alliance Boots’ debt, Walgreen will still be financially flexible. Post-merger, the combined companies should only have a debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) of 1.0, which is still below CVS’ debt-to-EBITDA ratio of 1.14.

Walgreen grossly underperformed CVS over the last decade. CVS’ stock has beaten Walgreen’s by more than 200% for the last 10 years. The Alliance Boots acquisition could be just what Walgreen needs to close the gap. This is, in part, due to Walgreen’s inferior margins.

But Walgreen could soon see a boost in its margins. Alliance Boots gives Walgreen more expo-sure to higher-margin health and beauty products – which accounted for nearly a third of Alliance Boots’ revenues. Putting these private-label products in Walgreen’s storefronts should help bring additional revenue and boost margins.

Risks to Consider: The Alliance Boots acquisition will need approval from regulatory bodies, which presents some risk that the deal will fail. Walgreen is also still heavily reliant on the broader economy in the United States, thus, any delay in the economic recovery could put pressure on Walgreen.

Action to take –> Even without the tax inversion, Walgreen is a buy. Walgreen is in better shape now than before. The move transforms Walgreen from a United States-focused drug store operator into a global health company. It also makes Walgreen the largest purchaser of generic drugs in the world, giving it unrivaled purchasing power.

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