Has Rite Aid Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Rite Aid (NYSE: RAD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Rite Aid.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.8% Fail
  1-Year Revenue Growth > 12% 3.3% Fail
Margins Gross Margin > 35% 26.4% Fail
  Net Margin > 15% (1.1%) Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 1.62 Pass
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   1 out of 7

Source: S&P Capital IQ. NM = not meaningful because of negative earnings and shareholder equity. Total score = number of passes.

Since we looked at Rite Aid last year, the company hasn't managed to improve on its 1-point showing. With its third straight score of 1, Rite Aid looks stuck in the doldrums despite a 20% gain for the stock in the past year.

Despite having a sizable network of drugstore locations under its belt, Rite Aid hasn't been able to generate the kind of success that rivals CVS Caremark (NYSE: CVS  ) and Walgreen (NYSE: WAG  ) have managed to create. With huge amounts of debt and consistent red ink on the bottom line, Rite Aid hasn't figured out how to stop backsliding, let alone move forward aggressively.

But lately, Rite Aid had its chance to shine. When Walgreen fumbled its relationship with pharmacy-benefit manager Express Scripts (Nasdaq: ESRX  ) , Rite Aid had a chance alongside CVS to poach Walgreen customers away from the fold. Even though Walgreen and Express Scripts have come to a new agreement, Rite Aid still has a good opportunity to hang onto newly won-over customers.

At least some positive impact showed up in Rite Aid's most recent earnings. Although the company still lost money, it was a narrower loss than expected. Still, with pharmacy same-store sales dropping 0.7%, Rite Aid hasn't solved its persistent problems just yet. Even a relationship with nutritional-supplement retailer GNC (NYSE: GNC  ) hasn't helped turn things around at Rite Aid.

For Rite Aid to improve, it needs to get itself back in the black and growing again. Unfortunately, in a competitive industry, that's a tough assignment. Even if it succeeds in surviving, it'll take a lot for Rite Aid to start looking anything like a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Rite Aid may not be perfect, but we have some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Add Rite Aid to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services have recommended buying shares of Express Scripts. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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