Huge Hedge Fund Interest In Rite Aid Corp. (RAD)

Beating the market can be difficult when picking stocks on your own. One common source of alpha can be focusing on small cap stocks, which tend to outperform its larger peers over time. Another source of alpha can be following the smart money, by mimicking the trades of professional investors. Our research has shown that, by combining these two approaches – buying the most popular small-cap stocks recently purchased by hedge funds – investors outperformed the market by 18 percentage points per year on average (read the details here).

Rite Aid Corporation (NYSE:RAD)

Rite Aid Corp. (NYSE:RAD) was one of the more heavily bought stocks by hedge funds recently, with Peter Rathjens‘ Arrowstreet Capital, David E. Shaw‘s of D E Shaw and Ken Griffin‘s Citadel Investment Group increasing their stakes significantly during the fourth quarter of 2013. In addition, Jerome L. Simon of Lonestar Capital Management initiated a new position during the quarter, while Phill Gross / Robert Atchinson of Adage Capital Management and Sander Gerber of Hudson Bay Capital Management added to their positions.

Rite Aid Corp. (NYSE:RAD) is a $6.4 billion market capitalization company that is the third largest drug retailer in the United States, with 4,592 stores located in both the East and West Coasts and annual revenue of $25.4 billion. The stock has rallied strongly since December 2012, when it reported its first quarterly profit in years, thanks for making good progress on its turnaround plan. RAD has continued to execute on its plan ever since (including during the most recent fiscal third quarter ended November 30, 2013, when it increased its forward guidance above consensus expectations), increasing its EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) from a low of $859 million in fiscal year 2011 to $1.3 billion for the last 12 months through its third quarter of fiscal year 2014, through a combination of reinvigorated top-line growth, reduced selling, general and administrative expenses and refinancing of its debt.

In addition to its fundamental improvement, Rite Aid Corp. (NYSE:RAD) could be a participant in the ongoing transformation of the drug industry in the U.S. Prescription drug distributors have formed alliances with retail pharmacies to gain more pricing leverage with drug manufactures while obtaining larger scale in higher-growth international markets. The trend started in 2012, when drug retailer Walgreen Co. (NYSE:WAG) acquired a 45% stake in privately-held Alliance Boots GmbH, a U.K-based wholesaler and retailer. Shortly thereafter, the two firms formed a partnership with drug distributor AmerisourceBergen Corp. (NYSE:ABC). Naturally, speculation began on the Street regarding the next possible deal, with some expecting Rite Aid Corp. (NYSE:RAD) to be acquired by U.S. drug distributor McKesson Corp. (NYSE:MCK). Those hopes were subsequently dashed when MCK agreed to buy German pharmacy Celesio AG (DB: CLS1) for $8.4 billion in October 2013. However, the possibility of another suitor is still in the cards.

The shares are not cheap, trading at forward P/E and EV/EBITDA multiples of 22.3X (versus 19.1X for peer group) and 9.6X (versus 9.9X for peers), respectively. However, with continued progress on its turnaround plan, Rite Aid Corp. (NYSE:RAD) offers a way to gain exposure to favorable secular trends – including an aging population that tends to fills their prescriptions at retail pharmacies and expansion of prescription drug insurance coverage due to the Affordable Care Act (ACA) – at a reasonable valuation. A potential acquisition by another drug distributor would be an added bonus, but not central to the investment thesis on the stock.

Disclosure: none

Recommended Reading:

Skytop Capital is Betting on Services and Financials

Valueact Surges Stake in Dresser-Rand Group Inc. (DRC)

Mason Capital Management Initiates 6% Stake in Men’s Wearhouse (MW)

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!