Rite Time for Rite Aid?

04/04/2003 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

"Before Enron, Worldcom, and Adelphia, there was Rite Aid, one of the first companies caught up in accounting scandals," says Vahan Janjigian, editor of the Forbes Growth Investor. "Its problems have been largely forgotten by most market participants, except for those who bought the stock in 1999 at $50 a share. The drug chain was building out new stores and acquiring others. The stock dropped from $50 to the low single digits. Here's why, and reasons several top advisors think things may turnaround.


“During its buying spree, Rite Aid (RAD NYSE) also bought PCS Health Systems, a pharmacy benefits manager, taking on $6.3 billion in debt.  They then announced accounting difficulties and $1.6 billion in earnings were restated.  Management was replaced, the auditor resigned, and investors lost confidence and dumped the stock. Many predicted bankruptcy.


“RAD sold the benefits system at a substantial loss and refocused on 3,400 retail drugstores. The company is getting back on track under new management. For the latest year, the company lost $16 million, versus a $112 million loss the prior year. Meanwhile, the company recently expanded its relationship with General Nutrition Companies. RAD had already been selling GNC-branded vitamins, but the new agreement calls for at least 1,000 GNC stores as divisions within Rite Aid stores.


“Overall, the company still has a lot of debt and is still losing money. But due to significant improvements, it is now highly ranked by our quantitative stock selection model. Nonetheless, an investment in this low-priced stock entails a high degree of risk.”


Adds John Dessauer, editor of Investor’s World, “We see more evidence that Rite Aid is making progress developing sales per store, despite the fact that the overall retail environment remains difficult. The company just sold $300 million in senior secured notes, at a 9.5% yield. The offering was oversubscribed and increased from a planned $200 million. This should put to rest any balance sheet concerns. The remaining question is how much the company is worth. With over $15.5 billion in annual sales, it is my opinion that the stock, debt and all, is still worth more than the current price. Buy.”


From a technical and trading standpoint, Elliott Gue , editor of Wall Street Winners , adds, “Rite Aid probably looks familiar to our readers as we traded it profitably back in December-January. It looks like it’s setting up as a long again. The stock broke above both its 20- and 200-day averages, which happen to be close to each other, on rising volume. Overall we don’t have a high opinion of retail, but Rite Aid is a special turnaround situation.


“Even though we happen to be bearish on the general market, we’ve no quarrel with a bullish case for a good looking the stock. Yes, we are doubtful about the  current upmove in US stocks, but another leg up in the rally will likely spread to secondary stocks like Rite Aid.  So for now, we are buying Rite Aid below $2.50 a share, and placing a mental stop-loss order at $2.10.”

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