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Saturday, January 28, 2023

There Is No Good Reason to Buy Rite-Aid Stock

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The retail sector has seen the following common saying play out: “The cream of the crop rises to the top.” Thanks to the novel coronavirus, we’ve seen this play out faster than ever before. Retailers like Rite Aid (NYSE:RAD) are not what they used to be, and that’s clear after Rite-Aid stock underwent a 20-for-1 reverse stock split just over a year ago.

There Is No Good Reason to Buy Rite-Aid Stock

Source: Jonathan Weiss / Shutterstock.com

To Rite Aid’s credit, the stock has not completely fallen apart. The split took place in April 2019, while shares bottomed a few months later near the end of August. From those lows — not the coronavirus lows — the stock is up nearly 200%.

That’s not too shabby for a company that Wall Street has been waiting to see fall off the exchanges. But at the end of the day, I’m not looking to pick over the scraps of a company well beyond its glory days.

We want our stocks to have their glory days in front of them, not in the rearview mirror. So as much applause as Rite Aid may seemingly deserve for not going belly up during the Covid-19 outbreak, it’s not one we’re going to put in our portfolios.

Rite-Aid Stock Is Still Challenged

There’s no other way to put this but, Rite Aid remains challenged. The company faces competition on virtually every front.

In its grocery and convenience business, it has countless competitors. That ranges from gas stations, to Walmart (NYSE:WMT), to dollar stores. On the pharmacy front, it faces Walgreens (NASDAQ:WBA) and CVS Health (NYSE:CVS), along with countless other companies ranging from mom-and-pop pharmacies to public companies.

If we’re looking at just pharmacies, it’s not difficult to make the case that CVS and Walgreens have better fundamentals. Heck, even the bulls behind Rite-Aid stock will tell you that much.

And of course, Amazon (NASDAQ:AMZN) is making everyone’s life more difficult. The online juggernaut continues to capture market share in the retail space, as it pushes into physical storefronts. It’s working on ways to wiggle into the pharmacy industry, too.

That may actually put Rite Aid in a more favorable spot, should Amazon look at it as a partner or a target rather than a competitor. With its $850 million market cap, it’s either a juicy target for Amazon or a dead one should it go at the space alone and actually make headway.

Rite Aid has had virtually no revenue growth over the last few years. Unfortunately though, it continues to turn in a negative bottom line, losing $420 million in fiscal 2019 and $452 million in 2020. It has also seen its assets shrink over the years.

On the plus side, Rite Aid has $3.7 billion in current assets vs. current liabilities of $2.76 billion. This gives the company some breathing room, as the latter is not dominating the former, causing concern for whether it can cover short-term obligations.

However, with a bulk of current assets tied up in inventory and with just $218 million in cash, there are some concerns about Rite Aid’s liquidity.

It’s not the end of the world, but hardly the secular growth story I generally seek out.

Trading Rite Aid

Surprisingly, Covid-19 may have been the one thing that kept Rite-Aid stock kicking. After gapping up in December on a furious short-covering rally, shares were settling into place in 2020.

While the stock took a hit in March, it was quick to recover its losses and actually rallied back up toward $20. The $20 level is where dreams go to die with the stock, as this level looks like stiff resistance.

To get there again, bulls need to see Rite-Aid stock hold the 50-day and 20-day moving averages — something it’s struggling to do right now — and then reclaim downtrend resistance by clearing $15. Over $15 puts $16 in play, followed a possible move up to $20.

Even though I don’t like Rite-Aid stock, some bulls will still be too tempted to stay away. For them, they need to see Rite Aid hold up over the 200-day moving average and the $11 level.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.

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