Is Rite Aid A Buy Now?

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. Prescription drugs and the healthcare field in general is seeing the limelight as there are looming changes imposed by the United States Government. Look for Rite Aid to see rising profits on its steady general merchandise sales and a potential pop from changes in Congress.

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T = Technicals on the Stock Chart are Strong

Rite Aid stock has recently broken above a price range extending back to mid-2009. The stock is running higher and is now trading at prices not seen since 2007. 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

58.57%

53%

50%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August 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 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 Improving 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?

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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 improving earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have not been too pleased with Rite Aid’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Rite Aid

Walgreen

CVS Caremark

Express Scripts

Sector

Year-to-Date Return

113.24%

32.61%

19.38%

14.63%

31.46%

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 stock has recently broken above a value range and is now trading at prices not seen for several years. Over the last four quarters, earnings have been improving while revenue figures have been declining, so, investors in the company have not been too pleased. Relative to its peers and sector, Rite Aid has led in year-to-date performance by a wide margin. Look for Rite Aid to continue to OUTPERFORM.

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