Can Rite Aid Continue Its Explosive Run?

With shares of Rite Aid (NYSE:RAD) trading around $3, is RAD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Rite Aid is a retail drugstore chain in the United States that sells prescription drugs and a range of other general merchandise. Its offerings include prescription drugs, over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise, and other everyday convenience products, as well as photo processing. General merchandise suppliers make it simpler for the average consumers who wants a quick and efficient shopping experience when looking for convenience items.

The end of the serious influence of the Jean Coutu Group on Rite Aid is at hand as the drug store chain announced that a recent share sale will take Francois J. Coutu off the board, effective October 31. The links go back to 2007 and the recent share divestiture from that group effectively placed the holders under a 5 percent ownership threshold. Recently, Rite Aid posted earnings and revenues figures that beat Wall Street’s expectations.

T = Technicals on the Stock Chart Are Strong

Rite Aid stock has been exploding higher this year. The stock is currently trading near yearly highs and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Rite Aid is trading above its rising key averages which signal neutral to bullish price action in the near-term.

RAD

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Rite Aid options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Rite Aid Options

51.79%

96%

95%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Rite Aid’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Rite Aid look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

400.00%

172.22%

216.67%

54.55%

Revenue Growth (Y-O-Y)

-2.71%

-9.68%

-1.18%

-0.64%

Earnings Reaction

-6.43%

18.43%

16.34%

-3.05%

Rite Aid has seen rising earnings and declining revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Rite Aid’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Rite Aid stock done relative to its peers Walgreens (NYSE:WAG), CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and sector?

Rite Aid

Walgreens

CVS Caremark

Express Scripts

Sector

Year-to-Date Return

155.90%

29.05%

19.65%

18.02%

27.66%

Rite Aid has been a relative performance leader, year-to-date.

Conclusion

Rite Aid, through its stores across the United States, provides prescription drug and general merchandise products to consumers and companies. The company recently reported earnings that have impressed investors and is also making some board changes. The stock has been surging higher and is now trading near highs for the year. Over the last four quarters, investors have mixed feelings about recent earnings announcements as earnings have been rising while revenues have been declining. Relative to its peers and sector, Rite Aid has been a year-to-date performance leader. Look for Rite Aid to OUTPERFORM.

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