In the spirit of the late John C. Bogle, Warren Buffett, and Charlie Munger, I like to recommend bargain hunting when other traders are fearful. For health-care market aficionados, I present to you Rite Aid (NYSE:RAD) stock; RAD stock is a prime bargain that won’t be appreciated until its big turnaround is well under way.
I’m not expecting much support as I expound on my bullish thesis on RAD stock, but my loyal readers (whom, no doubt, I can count on one hand) should know by now that nothing makes me happier than supporting unpopular opinions. Allow me to embark on this steep, uphill battle, then.
RAD Stock Takes the Elevator Up
Despite my audacious call to action, recommending Rite Aid stock as a bargain would have been unthinkable just a few weeks ago. Indeed, the shares were trading below $8 in mid-December, but they had jumped above $22 on the 27th of that month.
A full 20% of that ascent transpired in a single trading session after the company’s Q3 results surprisingly beat expectations. After suffering the slings and arrows of relentless analyst scrutiny for months, evidently RAD stock had suddenly become the darling of analysts and investors alike.
Given the numbers Rite Aid delivered,it’s not hard to see why the investing community suddenly became fans of Rite Aid stock. While analysts’ mean estimate had called for adjusted earnings of 7 cents per share in Q3, the actual number (and I swear this isn’t a typo) was 54 cents per share. Before the company reported its Q3 results, RAD stock had plunged 49% over the previous 12 months. But at last, a turnaround of the shares appeared to be possible.
Indeed, Rite Aid stock price doubled within a matter of weeks. I wish that the story could have simply ended there, but these cruel markets seldom deliver a storybook ending. When hope morphs into hype, that’s often a signal to get out of a stock, not into it.
The Rally Fizzles, But a Second Chance Emerges
In hindsight, it’s as clear as day that RAD stock had climbed too far, too fast after its earnings announcement. After peaking on Dec. 27, Rite Aid’s shares fell to $16 by the end of 2019 and then declined to $12 by Jan. 10. I often say that chasers get punished, and those who bought RAD stock at the top are now holding a weighty bag.
I searched high and low for a negative catalyst, but I simply didn’t find one; as far as I can tell, the price just went up too much and a retracement was needed. Investors might not get another chance to buy RAD stock at $8. But the market has demonstrated a willingness to push the shares up to $20+, so the risk-reward ratio of the shares at $12 seems decent.
Besides, it’s not as if all the encouraging news revealed by the company’s Q3 earnings has suddenly vanished. For those considering buying RAD stock, I feel it’s worthwhile to read through the transcript of the Q3 earnings conference-call transcript, which seems to indicate that the company has a good plan as it strives to recover its momentum in 2020. Of particular interest, I feel, is Rite Aid’s commitment to serving the growing population of Medicare Part D members. The company stated:
“In summary, we now have over 700,000 Medicare Part D members, including over 380,000 choosers. We experienced good results for the recent Medicare Part D annual enrollment period for calendar year 2020, with net growth of over 140,000 Medicare Part D members for the month of January 2020. Also, our Envision mail order pharmacy specialty revenues are up 27% year-over-year. And specialty claims are up 24% over prior year, primarily due to the increase in Medicare Part D members.”
I see Medicare recipients as a strong driver of revenues for the company and for the health-care market generally, and it’s encouraging to know that Rite Aid is taking this demographic seriously.
The Takeaway on Rite Aid Stock
Rather than get hung up on RAD stock’s descent from $22 to $12, I prefer to see the glass as half-full and note that the shares were just $8 not too long ago. I’m actually glad that the market deflated the price of Rite Aid stock somewhat. The shares were undoubtedly overheated and needed to come back to earth. Now the price is low enough to grab some shares and, perhaps, watch them take off once again.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.