Among the biggest losers in Thursday’s early trading are Walgreen (NYSE: WAG), Contango (AMEX: MCF) and School Specialty (Nasdaq: SCHS).

Walgreen: the Law of Unintended Consequences

When Walgreen (NYSE: WAG) announced that it was going to steer any new customers toward pharmacy benefit managers (PBMs) other than CVS Caremark (NYSE: CVS), the company likely assumed that CVS would be grateful to still have the ongoing business from Walgreen’s existing set of customers. CVS’s announcement earlier this week that Walgreen can take all of its business elsewhere — thank you very much — appeared to catch Walgreen off guard. Suddenly, its customers need to quickly get signed up with a new PBM.

Walgreen’s consumers who are absolutely dependent on the timely receipt of medicine may be getting spooked by all of the corporate drama, and may take their business elsewhere. That concern is pushing shares of Walgreen down another -3% in Thursday trading, leading to a -20% drop over the last month.

Action to Take –> None. This is just too hard to handicap. Walgreen may find an alternate PBM very quickly and seamlessly migrate its customers in a rapid fashion. Walgreen and CVS may also kiss and make up. Or Walgreen may take a serious blow from defecting customers. We simply don’t know. Shares will likely be well higher or well lower when the dust settles. They’re just marking time at $29 as investors wait to see a positive or negative resolution. In the event of a really sharp drop in shares, back toward the $20 mark where they were 18 months ago, investors should pounce, as Walgreen has a sizable retail footprint that will eventually produce historically adequate profit margins.

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Contango lower on Updated Drilling Results

Shares of Contango (AMEX: MCF) an offshore driller focused in the Gulf of Mexico, are off -5% in Thursday trading, but not for the reasons you’d think. Indeed, shares of Contango had fared well relative to other Gulf drillers, dropping less than -20% in the recent sector plunge. That may be because Contango barely has a following on Wall Street, with just one analyst providing coverage.

#-ad_banner-#Contango’s share price weakness today is a function of updated drilling results. The company found that a once-promising oil patch in the Gulf is a lot less promising than had been thought. As a result, the company is now sitting on about -15% less oil and gas than it previously estimated. But it’s worth noting that even with that downward estimate, the value of its untapped reserves is still more than $1 billion or 30% higher than the company’s market value. That gap is typical, as investors like to apply a hefty discount to the value of potential reserves stuck in the ground.

The other takeaway here is that Contango is estimating the value of its reserves at current oil and gas prices. But many expect natural gas, which are stuck near multi-year lows, to rise in value as the economy rebounds. Any spike in natural gas prices would yield a commensurate boost in the stock.

Lastly, buried in the press release was a comment form management that is likely being whispered throughout the industry: “The concept of unlimited environmental liability for a spill, or a limit so high that a debt-free company with an approximate $1.0 billion market cap like Contango is in essence, asked to ‘bet the Company’ every time we drill a well. The move in recent days by some in Congress to retroactively change the law regarding environmental liability does not give me great confidence in our government. Nor do comments about ‘boots on throats.’ The second area that causes great concern is the thought of going to jail for a judgment error or equipment failure – especially if the MMS approved the procedures that were being followed.”

This is indeed a tricky time for drillers, regulators and investors. Regardless of how you feel about the industry and its practices, the Gulf Coast remains a vital part of U.S. energy policy, and it’s hoped that the heated rhetoric coming from all sides can eventually cool. Government bashing doesn’t help. Company bashing doesn’t either.

Action to Take –> As the dust settles on where government policy, natural gas pricing, and this summer’s hurricane impact are processed, investors will have a fresh chance to identify whether Contango or other offshore drilling stocks hold deep value. Right now, investors are making bets in the dark.

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School Funding Starts to Bite

Dissecting the quarterly results from School Specialty (Nasdaq: SCHS) creates a real conundrum for investors. The supplier of textbooks and other curriculum aids is starting to feel the impact of recent education budget cuts. And management notes the fiscal year that just began will bring a further noticeable drop in sales. Shares are off -6% in Thursday trading. And they now trade at only about 40% of the value they held back in the middle of the last decade.

Clearly, any company that sells its goods and services to local governments and school systems is going to see tough sledding for at least the next year or two. But for long-term investors, it may make sense to start to look closely at these companies. The longer that demand stays in a funk, the greater the snapback they’ll see as budgets loosen up. A lot of the goods they sell wear out, and will eventually need to be replaced.

School Specialty is a fine example of how investor patience should eventually pay off. The company has aggressively cut costs, so profits aren’t falling as fast as sales. In the just completed fiscal year, School Specialty earned $1.37 a share, but more important, generated nearly $5 a share in free cash flow. With today’s sell-off, shares trade for less than four times that figure on a market capitalization basis and less than eight times on an enterprise value basis. Strong free cash generation should allow for debt pay-downs, so shares really trade for about six times free cash flow on a projected 2012 enterprise value basis. And that year is likely around the time when sales and free cash flow should spike higher as school budgets loosen up and the company’s new lower cost structure should really shine.

Action to Take –> Investors need to shift their thinking in this market. Rather than just pursuing shares that look like appealing quick gainers, they should also expose their portfolio to stocks that are now quite cheap and lack near-term catalysts, but which can be expected to reward investors nicely over the long haul. School Specialty looks like just such an example.

In a similar vein, investors should research Tyler Technologies (NYSE: TYL), which provides IT systems to local governments. Tyler may get hit hard in the near-term if budget cuts lead to sales declines. If and when that happens, shares would fall and then look more appealing to long-term investors looking to get in ahead of rebounding budgets a few years out.