When I last weighed in on Rite Aid (NYSE:RAD), I noted “investors would be smart to avoid Rite Aid stock altogether. Fundamentally, RAD stock is still struggling – with no signs of improvement.” That was on Nov. 8, as the stock traded at a high of $10.41.
Shortly after, RAD would dip another 26% to a low of $7.52 — proof it was worth avoiding.
Still, even with mounting debt, heavy competition from the likes of CVS Health (NYSE:CVS) and Walgreens Boots Alliance (NASDAQ:WBA) and failed mergers, Rite Aid stock proved its an underdog that just refuses to die. It proved just that after gaining nearly 170% since mid-December to a high of $23.88 in recent weeks; All thanks to blowout earnings that crushed estimates.
Analysts were only expecting adjusted earnings per share (EPS) of 10 cents a share on $5.4 billion. Instead, RAD gave them 54 cents a share on sales of $5.5 billion. Thanks to short covering — which cost short-sellers as much as $187 million — and an earnings shock, Rite Aid exploded.
“It’s worth noting that Thrifty Ice Cream, which we recently expanded to 900 additional stores, was a meaningful contributor to our third-quarter growth,” said James Peters, Rite Aid’s chief operating officer. Also contributing to these numbers, 2.3 million flu shots were given by the end of the quarter — more than the entire previous year.
Furthermore, RAD even raised guidance. It now sees fiscal 2020 EPS of between 13 cents to 55 cents, compared to five-cent estimates. Also, the company expects sales sales of between $21.5 billion and $21.9 billion for 2020, as compared to estimates calling for $21.64 billion.
While that all sounds great, it’s a good idea to sell if you’re long because the good news won’t last.
Analysts are Still Bearish on RAD
“Our team delivered a strong quarter that provides us with momentum as we prepare to roll out our long-term strategy and position Rite Aid Corporation as an innovative leader in our industry,” said Rite Aid CEO Heyward Donigan.
She also noted the company would “soon reveal” the company’s long-term strategy by “leveraging the trust of expertise of our pharmacists in meeting the unique health and well-being” of customers by their analyst day on March 16.
Unfortunately, that didn’t seem to impress analysts.
Analysts at Guggenheim and Deutsche Bank raised their targets to $12 a share. However, they are both still maintaining a sell rating on the stock. Goldman Sachs raised its price target to $5.50, and maintained a sell rating. JP Morgan has a neutral rating on the stock with a price target of $8.
Even Rite Aid’s CEO knows the company isn’t out of the woods just yet. “While we are pleased with these results, we have important work ahead of us to put our company on a path to long-term sustainable growth,” she said. We also have to realize that any turnaround in Rite Aid will take time, with plenty of bumps still ahead.
“Unfortunately for owners of RAD stock, it has become the Sears of retail pharmacies. It too would have already become an over-the-counter stock had it not instituted the reverse split. Like Sears, it has no place in today’s retail world,” noted InvestorPlace.com contributor Will Healy.
The Bottom Line on Rite Aid Stock
While it may be enticing to chase the Rite Aid stock rally, I wouldn’t touch it. A solid quarter and hope from the executive team may not be enough to push RAD stock higher. This, along with a heavy debt load and mounting competition, makes RAD one of the top stocks to avoid in 2020.
Unless the new CEO has something miraculous to say along with its long-term strategy at its 2020 analyst day, RAD stock could pivot lower again soon. In addition, if the company was that confident and that excited about its turnaround plan, it wouldn’t wait nearly four months to reveal the details.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.