Why Has David Einhorn Been Selling Rite Aid?

Should you follow suit or might you actually want to buy shares?

Mar 12, 2014 at 4:45PM

The latest 13F season is here, when many money managers issue required reports on their holdings. It can be worthwhile to pay attention, as you might get an investment idea or two by seeing what some major investors have been buying and selling.

For example, consider David Einhorn, highly regarded value investor and founder of Greenlight Capital. Einhorn's investing success, as well as his advocacy of financial transparency and accountability, has attracted many fans. Although he isn't afraid to short stocks, he prefers going long, looking for situations where he feels a stock is mispriced. He started Greenlight with less than $1 million, and it now boasts a stock portfolio worth more than $5 billion. Greenlight Capital has averaged close to a 20% annual return since its 1996 inception.

Greenlight Capital's latest 13F report shows that it sold off a quarter of its shares of Rite Aid Corporation (NYSE:RAD). Why might it do that? Well, let's see.

Turning itself around
Rite Aid is in the midst of an impressive turnaround. A glance at its historical stock price is telling. Over the past 20 years, the stock averaged annual losses of about 0.5%. It averaged just a 1.9% gain over the past decade. And yet it has nearly quadrupled in value over the past year.

The 2013 fiscal year was one of the company's best ever, as it returned to profitability despite a slight downtick in revenue. Successful maneuvers have included shuttering underperforming stores while remodeling and relocating others. Rite Aid has also been focusing more on wellness initiatives. Its pharmacies, for example, have been pushing vaccines (as have its peers), and many Rite Aid locations are now dubbed Wellness Centers.

The company has been starting and extending some savvy partnerships, such as with McKesson (which delivers most of its prescription drugs) and GNC Holdings (which houses some of its stores within Rite Aid stores). CVS Caremark Corporation (NYSE:CVS) threatens Rite Aid's GNC partnership, though, with its new Family Vitamin Centers. (However, Rite Aid could get a boost from CVS' decision to stop selling tobacco products.)

Rite Aid's third-quarter report was mixed, featuring estimate-topping earnings and revenue up 2%, though management tempered near-term expectations. Its fourth-quarter and full-year results will be reported on April 10, so stay tuned if you're interested.

On the other hand...
Meanwhile, not everything is rosy at Rite Aid. It has been growing more slowly than its key rivals, and they're better positioned, competitively, with larger bases and healthier balance sheets. They're formidable foes.

Bears would also remind us that Rite Aid still carries a lot of debt -- more than $5.8 billion recently. Its return to positive free cash flow can help pay down that debt, but cash flow levels are still low, relative to debt.

Also consider
Even if you're bullish on Rite Aid, you might consider its rivals for your portfolio, too. For one thing, they pay dividends, with CVS Caremark recently yielding 1.5% and Walgreen Co. (NASDAQ:WBA) yielding 1.9%. CVS' revenue and earnings have been growing by about 8% to 10% annually over the past five years, while dividends have averaged 29%. Walgreen's revenue and earnings have been averaging single-digit growth over the past five years, and its dividend has averaged about 23% growth. CVS' forward P/E was recently 14.7, below its five-year average of 15.5, while Walgreen's was 16.9, a bit above its 16.6 average. Rite Aid looks cheaper than both, with its forward P/E of 12.3, but the others offer more stability and certainty.

More from The Motley Fool
Finally, if you have drugstores on your mind, give a little thought to Obamacare, too, as it will affect the business of most health-care-related companies. Obamacare may seem complex, but it doesn't have to be.You can learn the critical facts about it in a special free report called "Everything You Need to Know About Obamacare." This FREE guide contains the key information and money-making advice that every American must know. Please click here to access your free copy.

Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark and McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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 Motley Fool has a disclosure policy.

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