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Rite Aid Corporation (RAD): After a 6-Month 200% Gain, Here Are Two Ways You Can Play This Stock

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Rite Aid (RAD)I have covered Rite Aid Corporation (NYSE:RAD) since it was $1.21, the price at which I bought, following its first quarterly profit in six years. I have constantly said to “buy” – showing its level of upside relative to the industry here – giving a long-term $7 price target here – and remaining bullish even after its 200% six month gains. It’s safe to say that I am bullish when it comes to Rite Aid, but after producing weakness on Thursday, I see two ways to play the stock moving forward.

What happened on Thursday?

June 18, I wrote my very first cautionary Rite Aid Corporation (NYSE:RAD) article, appropriately titled “A Cautionary Approach to Rite Aid” In the piece, I presented my belief that Rite Aid was due for a small pullback, and that earnings could be the event to produce the loss.

I also disclosed owning 15,000 shares, and that I was selling 5,000 ahead of earnings; hoping to buyback at a cheaper price. Turns out, I was right, as the stock pulled-back more than 7% after earnings.

Following this post-earnings pullback, I now see two ways to approach the stock.

  1. Preparing For Speed Bumps

In my article, “A Cautionary Approach to Rite Aid” I explained that recently updated full-year net income guidance of $49-$189 million, leaves the company performing somewhat poorly in the second half of the year, relative to its start of the year.

For its most recent quarter (Thursday), the company posted a profit of $89.7 million. Thus, Rite Aid Corporation (NYSE:RAD)’s remaining three quarters could produce a combined loss of ($50 million) or a profit of $100 million. When you consider that Rite Aid has now produced three consecutive quarterly profits, the market may not be unforgiving to any future net losses.

According to Rite Aid Corporation (NYSE:RAD), fewer generic introductions will lead to a more difficult second half of the fiscal year. So far, the company’s incredible fundamental improvements have been mostly due to new generic drugs, as these drugs pay larger premiums to pharmacies.

But with fewer generics, it is possible that we see short-term weakness. Thus, with the company already trading higher by 200% in the last six months, you might want to wait and see how the company performs in future quarters before buying; or trim your position for the second half of the year.

  1. Go Long-Term!

Seeing as how Rite Aid Corporation (NYSE:RAD)’s most impressive quarters have already come and gone – at least for the short-term – it makes sense that some would want to sell their shares and seek value elsewhere. The only problem is that there really aren’t too many places in the market with greater value than Rite Aid.

The bottom line is that Rite Aid is now profitable. The six years of net loss that drove its stock from $6 to $1 is now a thing of the past; as the company has greatly improved operationally. Now, because it lost so much value from 2007 to late-2012, the stock is significantly cheaper than Walgreen Company (NYSE:WAG) or CVS Caremark Corporation (NYSE:CVS).

Rite Aid Walgreen CVS
Trailing P/E 12.3 13.3 13.0
Profit Margin 0.47% 2.91% 3.3%
Price/Sales 0.10 0.65 0.57

As you can see, Rite Aid is cheaper compared to both future earnings, and then definitely when compared to sales. This chart shows the level of value present in shares of Rite Aid Corporation (NYSE:RAD) – six times cheaper compared to sales – but it also has more room to fundamentally improve versus Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS).

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