Why Rite Aid Corporation Shares May Keep Rising

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Rite Aid Corporation (NYSE: RAD  ) popped about 3% this morning after Goldman Sachs upgraded the drugstore operator from neutral to buy.

So what: Along with the upgrade, analyst Robert Jones boosted his price target to $8 (from $5), representing about 24% worth of upside to yesterday's close. So while contrarians might be turned off by the stock's strength during the past year, Jones' call suggests that the positive sentiment surrounding Rite Aid's turnaround story isn't fading anytime soon. 

Now what: According to Goldman, Rite Aid's risk-reward trade-off remains rather attractive. "Two key elements to the story are store remodels and balance sheet deleveraging, and the expanded agreement with [McKesson] should allow for the acceleration of one or both," said Jones. "Importantly, on its core outlook, we see stronger comp growth ahead, which should only be compounded by RAD's higher exposure to states that expanded Medicaid (65% of stores vs. 47% for [CVS Caremark] and 54% for [Walgreen]...)." When you couple Rite Aid's red-hot stock price with its still-hefty debt load and fragile competitive position, however, I'd wait for a much wider margin of safety before jumping in.

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  • Report this Comment On March 12, 2014, at 11:58 AM, gorlickg wrote:

    The Rite Aid story shows what power good management has---in comparison to pathetic management. Rite aid finally has a jockey that knows how to ride this little filly

    Cyborg1939

  • Report this Comment On March 17, 2014, at 1:47 PM, tomd728 wrote:

    "wait for a higher margin of safety" ?

    Brian in all due respect RAD was selling @ 50 c a copy not that long ago.GS throws an $8.00 handle on RAD !

    I have enough RAD now to enjoy the continued upside as the RAD customers, the MKC link, the ageing population,the store locations,a capable management,encourage my thoughts on nowhere to go but higher and find the balanced price RAD will find.

    No "priced to perfection" plaguing this re-birth.I don't expect a CVS or even a WAG to emerge here but anyone who wants a space/sector play in safety with RX should consider all 3.

    I own CVS,WAG,RAD.

    Thank you for your thoughts and keep 'em coming ....Tom D.

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