If Rite Aid Corp. (RAD) was a theatrical play, it would probably be a Greek tragedy. After hitting its highs above $50 in 1999, the stock fell off of a cliff to points near-zero and we have seen only modest gains since then. Currently, we are trading slightly above the $2 mark and investors considering buy positions in the stock are now wondering whether or not there is any reason for optimism going forward. But what the perma-bears have missed in this ride to the bottom is the disjointed nature of the US economy – and the type of spending behavior that is associated with regions where Rite Aid has built most of its stores. Improving macro factors in the lower-income demographics that make up a majority of Rite Aid’s customer base suggest that there is more potential here than meets the eye. And if you are an aggressive investor with a contrarian sensibility, the potential for a bullish turnaround does exist if buy positions are measured and patience is exercised.
In the chart above, we can see that Rite Aid has not seen much benefit from the positively trends in this year’s stock market activity. On a YTD basis, the stock has lost almost 72% of its value and we have seen almost nothing resembling a bounce from the lows. Failed deals with Walgreens (WBA) and constant concerns over the potential of Amazon, Inc. (AMZN) to take over almost every aspect of the consumer retail experience have generated most of this bearish activity. This has caused many short-sellers to overlook internal positives like the encouraging performances that have been seen in Rite Aid’s pharmacy benefit manager (PBM), Envision RX. The underlying disconnects here create a scenario where those shorts could be forced to cover if broader economic factors start to look more supportive for RAD in its base businesses.
But perhaps the most critically bullish element here is the fact that substantial portions of Rite Aid’s customer base are not part of the demographic that is making the shift toward digital retail purchases from companies like Amazon. With heavy store concentrations in the southern and midwestern portions of the country, the perma-bears should keep in mind that most of this customer base relies on in-person purchases made in local stores.
Here, the extreme and long-term outlook that is used to argue for stocks like AMZN and against smaller retail outlets like Rite Aid does not coincide with the immediate reality in terms of what is likely to be seen in consumer spending trends. The activity here continues to show reasons to be optimistic – and this will ultimately give retailers like Rite Aid the context it needs to drive revenues and bring a real reversal in the stock.
In the chart above, we can see that the broader trends in consumer spending are clearly positive. It is somewhat rare to see what is almost a complete lack of volatility in an economic data report, but the trends here suggest that US consumers will continue to have little difficulty in making basic and necessary purchases like those typically made at pharmacies and small, local retail outlets like Rite Aid.
Supporting the trends in consumer spending, we continue to see declines in the US unemployment rate. The current levels at 4.3% are typically thought of as full employment levels, and this creates little doubt that the trends in consumer spending will remain viable.
Further supporting these broader trends is the fact that ‘help wanted’ ads have climbed to new records in recent months. This means that the unemployment rate should hold near ‘full’ levels and this will continue to support the positive consumer spending trends that will be needed to generate revenues within the smaller retail outlets
Rite Aid Stock Analysis: Dividend Investments.com
From a valuation perspective, the above outlook suggests a strong potential for further gains. After breaking above the June 2007 highs at $6.70, stock prices in RAD removed critical resistance levels that would otherwise have kept prices depressed for the long term. To be sure, any long positions taken at current levels should be enacted with the potential for risk tolerance in mind given the volatile nature of the stock and the contrarian nature of the bullish stance. Long positions should only be taken incrementally as investors can protect against excessive risk by scaling into positions in parts (no more than one-third of the total position at any given time). This will create greater potential for gains and less risk in the event that markets do eventually see a bullish turnaround in RAD.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.