3SOF

RAD will be bought today for the 3 Stocks on Fire Portfolio, 6.66% of capital as usual, at the open, as volume is extremely high.

Here's my initial analysis on the stock:

1. Introduction

RAD came up on my technical filter as a stock that has been making new 52 week highs with volume above average. The chart looks attractive, so I think it is a good idea to take a somewhat deeper look into it.

2. Profile

Rite Aid Corporation (RAD), through its subsidiaries, operates a chain of retail drugstores in the United States, which primarily provide pharmacy services. (complete profile here)

3. Technical Analysis
3.1. All History Chart



This is quite an interesting all history chart (my database only goes back to 1980). The company has been around for a very long time (it was founded in 1927), and the stock hit its all time high back in 1998, at $51.12. It looked like a secure investment back then. Suddenly it completely collapsed to a low of $1.65 in July 2002. Even for long term investors, there's a time to buy and a time to sell.

3.2. Medium Term Chart



There was a powerful bullish breakout in December. The medium term trend is positive.

3.3. Short Term Chart



The short term trend is bullish and volume has been extremely heavy. 20 million shares on the breakout day and 10 million shares changed hands yesterday. No need to say I like that.

4. Fundamental Analysis
4.1. Number of Shares Outstanding



The company has been aggressively buying back shares over the last couple of quarters. The current market cap is 532,217,494*$5.24 = $2.79 B.

4.2. Liquidity



The balance sheet is somewhat weak, given that the company only has $96 M in cash and equivalents and $2.4 B in inventories, but I think it is acceptable.

4.3. Revenues



Revenues rose on 12 of the past 13 years. Only in 2001 there was a small revenue decline. By this revenue graph nobody would have guessed the extreme fluctuations the share price had.

The revenue multiple is $2.79 B/$17.53 B = 0.16. The drug stores industry average is 0.36, but names like CVS and Walgreen have much higher revenue multiples, 0.60 and 0.93, respectively.

Motley Fool has an interesting article on this subject: Rite Aid: Comps Mean Competition

4.4. Profits



It is clear from this EPS graph that this is the number one issue driving RAD's share price over the years (as with most stocks). The 2006 EPS of $1.89 was due to a tax benefit of $1.229 B, without that EPS would have been $0.06.

Analysts are estimating EPS of $0 for the annual period ending Feb 07 and $0.06 for 2008 (ends in Feb 2008). Perhaps their estimates are too low, at least that's what the chart is saying.

5. General Overview

I don't see much risk in buying RAD's shares at current levels, trading with a market cap that is only 16% of one year's revenues and with the chart pointing north. I've read management's strategic plan on the latest 10-Q form and I think they deserve a vote of confidence.

Just using common sense, CVS and WAG are worth, considering the market cap, 9 and 16 times more than RAD, respectively. Yet, the three companies have almost the same number of stores, considering RAD just bought Brooks/Eckerd stores (5,177 RAD's stores, 5,400 CVS and 5,515 WAG).

As Motley Fool puts it, the drug stores industry can go back to being a three horse race again (or else, one of the bigger fellows could make a bid for RAD, it makes sense to me).

My general outlook on RAD is bullish.

6. Trading Plan

Buy 6.66% of capital in RAD shares at the open.

(this analysis will be updated daily from now on until I give a sell recommendation on it)

nice november presentation:
http://www.riteaid.com/www.riteaid.com/w-content/images/company/investors/IRPres111506.pdf

Cramer likes RAD and has been pushing it since the low 4's

Quote from: elliemae on December 13, 2006, 06:53:13 AM
Cramer likes RAD and has been pushing it since the low 4's

Is that so? Cool, nice publicity for the stock.

The company will report 3Q results (which ended on December 2) next Thursday:

• Rite Aid to Release Third Quarter Results on December 21
Business Wire (Wed 11:55am)

I'll continue holding it.

Next week we'll know about the quarter ended on December 2, but so far RAD is looking good. That "bearish" candle didn't materialize, we're moving higher and higher, as this undervalued company is showing up on everybody's radar (especially institutions).

I'll keep on holding RAD.

RAD is no momentum stock, it is a $2.9 B market cap company. I don't expect it to shoot very high over the short term.

But the trend is bullish now and everything tells me this will continue. I'll keep on holding RAD.

RAD went down 2.8% with people selling, again, because they fear the earnings that will be out on Thursday before the open. I don't fear the earnings, I expect them.

As I've said previously on another thread, anybody that fears earnings announcements is doomed to be a short term trader and short term traders don't make any money over the long term. They either lose, tire and give up or start being more longer term oriented. Of course, there's always a new crop of short term traders and day traders. And the best of them last something like 3 to 5 years.

Anyway, RAD is pulling back but the trend remains bullish and fundamentals are attractive. I'll keep on holding it.

Interesting comments about short vs long term.  I've been involved in the market now for about five years.  I  had some typical experiences and decided that short term in/out was best for me.  I used a technical trading service that literally wore me out.  I spent so much time having to watch the market for intraday moves that I simply got tired.   I was constantly trading.  I couldn't handle being away from the market even for a day.  I was always worrying.  I made good money but it was just too taxing for me personally.  Holding through earnings was a BAD thing.  I found 3SOF, studied the trading model, joined, and am much happier and worry a helluva lot less about the market.  I can read most of the threads on the stocks that I hold and do my daily DD in an hour or two.  I'm a happy customer since August 2005.  It fits me well.  Kudos...

PS.  I made a nice 55% gain on RAD in 2002-2003.

First saw RAD's "ascending triangle" coil developing back in October...

Now Im looking to get in on the retrace. What do you think about 4.75-5.00 entry for me since Im late to the move? (charts below)

Was also wondering what you guys thought about earnings and Walmarts presence in the drug retail industry?

Thanks for your positive review of the 3 Stocks on Fire Premium service JKN I'm glad you have improved your trading style, and more importantly, the quality of your life.

QuoteNow Im looking to get in on the retrace. What do you think about 4.75-5.00 entry for me since Im late to the move? (charts below)

I don't know if it will go that low calven. If it does I think it is a nice entry point. Yesterday's low was $5.03, but the candlestick left on the chart was somewhat bullish.

QuoteWas also wondering what you guys thought about earnings and Walmarts presence in the drug retail industry?

Estimates for this quarter are for revenues of $4.27 B. EPS average estimate is ($0.02). This is below the previous three quarters, so I think there's room for a positive surprise.

Anyway, the bearish scenario looks priced in to me, so if anything bullish comes out on the earnings report (I believe it will, the chart is pointing to that), the stock will probably rally to new highs above $5.5.

As for Wall Mart, they entered the sector, and yet CVS still is a $25 B market cap company and WAG is $46 B. RAD is just $2.73 B, and yet, the number of stores of the three companies is about the same.

I think there's a market for everybody, CVS, WAG, RAD and WMT. I expect RAD to be more efficient going forward and come back to profits. That may put its market cap closer to its peers, and that can represent an astounding gain on the share price.

I have some worries, though. I see the company paying a lot in preferred dividends, and as any common shareholder, I hate preferred shares. I'll dig that on tomorrow's update.

I'll continue holding RAD.

RAD's earnings will be out before the open. I'll review them as soon as they're released. Nice rally yesterday . Holding through earnings has been good for the 3 Stocks on Fire Portfolio lately, I'll keep on doing that, because the stocks held are undervalued.

Quote from: David Randolph on December 21, 2006, 05:33:24 AM
RAD's earnings will be out before the open. I'll review them as soon as they're released. Nice rally yesterday . Holding through earnings has been good for the 3 Stocks on Fire Portfolio lately, I'll keep on doing that, because the stocks held are undervalued.

Yes, there was a bit of a rally today on earnings. I read the news release and I've been hearing the conference call. Nobody is making the right questions, it just tires me.

My focus is on this preferred shares dividends. That's what's making EPS so low, even though the company has been showing positive net income numbers.

Making some simple math (if you're interested, ask me how do I got to this number), the company has to pay about $35 M annually in preferred dividends. So, EPS positive numbers will only show with Net Income above $35 M. At $35 M net income, EPS is $0.

Moreover, the company needs to earn an additional $5.32 M for every increase of $0.01 in EPS.

For RAD to be truly undervalued here, it should have a forward earnings multiple of 10 or less. To have a forward earnings multiple of 10 or less, the company would need to show EPS of at least $0.55 in fiscal 2008 (it starts in March 2007). To show an EPS of $0.55, RAD would have to have net income of $35 M + (55*$5.32 M) = $327.6 M.

They never made it. Not even in the company's best years. Will they make it now? I don't know, but the probability of that happening is quite low.

Therefore the probability of RAD being undervalued is also rather low.

So, with this further study I conclude the stock isn't worth my money, I'll have to take my small 4.4% profit and run.

The plan is to SELL RAD.

I agree David, I've followed RAD for several years, especially after the big stock price drop several years ago, and something with this company just does not add up.  There is a reason why CVS and WAG are the two top drugstores.

RAD has been steadily going up!