In a bull market, traders want to jump into low-priced, high-potential stocks, because they know the broader market’s momentum will carry these smaller players higher and offer the best returns. However, over the long haul, this isn’t where you want to be. Rite Aid Corporation (NYSE:RAD) is the only company of the three that didn’t manage to remain profitable during The Great Recession, and it currently sports a net margin of just 0.94%, whereas CVS and Walgreen sport net margins of 3.30% and 3.01%, respectively. Rite is also the only company of the three that doesn’t pay a dividend. As mentioned earlier, Walgreen currently yields 2.50%. CVS yields 1.50%.
Rite Aid Corporation (NYSE:RAD) sees the generic drugs trend picking up steam, and it’s planning to expand in that area, which looks to be a wise decision. However, it doesn’t offer brand recognition and strategic locations like its peers. If the economy were to falter, Rite Aid Corporation (NYSE:RAD) might have trouble competing with deeper-pocketed rivals. Rite Aid Corporation (NYSE:RAD) can be considering for a speculative trade, but I don’t recommend it as a long-term investment.
Then there’s Wal-Mart, a company that enjoys steamrolling small players in hot industries. Wal-Mart sees what’s happening with generic drugs, and it’s in attack mode. Wal-Mart has a couple of advantages. One, it attracts many consumers thanks to its wide array of product offerings (this can lead to increased drug sales and stolen market share from CVS). Two, it has low-cost manufacturing, primarily in India, which means it will have the ability to sell generic drugs for cheaper prices than peers.
Despite threats from Walgreen Company (NYSE:WAG) and Wal-Mart, CVS Caremark Corporation (NYSE:CVS) should still be capable of growth, especially on the bottom line. Top-line growth is likely, but it will be more challenging due to lower-cost generic drugs becoming the drug option of choice for consumers. It would be difficult to go wrong with CVS or Walgreen over the long haul. However, it’s highly recommended that you scale into these positions slowly as a safety measure against any downside moves in the broader market.
The article This Drug Store Can Make You Money originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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