The stock was sold off due to lowered guidance on earnings.
The stock is fairly valued on 2015 earnings estimates and earnings growth potential.
The risk/reward ratio is about equal at this price.
Rite Aid Corporation (NYSE:RAD) is a retail drugstore chain in the United States. On 10Apr14 the company reported first quarter earnings of $0.10 per share, which beat the consensus of analysts' estimates by $0.05. In the past year, the company's stock is up 154.79% and is beating the S&P 500 (NYSEARCA:SPY), which has gained 18.62% in the same time frame. Since initiating my position back on 24Dec13, I'm up 47.18% while the S&P 500 is up 6.63%. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if right now is a good time to purchase more of the stock for my growth portfolio.
The company currently trades at a trailing 12-month P/E ratio of 35.09, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.35 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.17), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 29.97%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 29.97%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 42.69%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of, but is sporting return on assets, equity and investment values of 3.1%, -9.2% and 18.1%, respectively, which are all respectable with the exception of the horrible return on equity number. In this particular instance, I will skip the dividend aspect of the financials because the stock is in my growth portfolio, and in the growth portfolio a stock does not have to have a dividend.
Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 46.82 and downward trajectory due in large part to the miss on comp store sales in May. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($7.72), I'm looking at $8.07 to act as resistance and the 50-day simple moving average (currently $7.37) to act as support for a risk/reward ratio, which plays out to be -4.53% to 4.53%.
- On 05Jun14 the company reported same-store sales increase of 3.5%, but that isn't what disappointed investors. The shares took a hit on the guidance that was provided as the company lowered expectations for fiscal year 2014 earnings, guiding to a range of $0.30 to $0.40 versus previous expectations of $0.31 to $0.42 per share.
Normally lowering forecasted earnings is a bad thing. Rite Aid said the lowered expectations are due to higher than expected drug costs and reimbursement rate reductions in the previous quarter. The May same store sales were still an increase though and this may just be a buying opportunity. Fundamentally, the company is fairly priced based on next year's earnings estimate and on future growth potential while sporting excellent near- and long-term earnings growth potential. Financially, it has no dividend to speak of and sports negative return on equity. On a technical basis, the stock has been oversold due to the guidance issue and the risk reward is about equal. Due to the equal risk/reward ratio, negative return on equity, and bearish momentum on the stock, I will not be pulling the trigger on this name right now. But rest assured that if I see the momentum begin to pick up again I'll be buying the dip, but I just think it can go down a little bit more in the next couple of days.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: I am long RAD, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.