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The Stock Market Is Crawling Higher as Rite Aid, KB Home Give Mixed Messages

By Dan Caplinger – Jun 25, 2020 at 11:34AM

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Investors are still struggling to figure out what's happening with the broader economy.

Thursday morning gave investors some renewed confidence in the staying power of the stock market. Initially, major benchmarks dropped as market participants feared the rising numbers of COVID-19 cases in the U.S., as well as other hard-hit areas like Brazil, Russia, and India. Yet indexes quickly rebounded, setting aside worries about 1.48 million new claims for unemployment benefits and instead hoping for a quicker recovery regardless of the status of the coronavirus pandemic. Just before 10:30 a.m. EDT, the Dow Jones Industrial Average (^DJI) was up 129 points to 25,575. The S&P 500 (^GSPC -0.20%) rose 9 points to 3,059, and the Nasdaq Composite (^IXIC) picked up 30 points to 9,939.

We're mostly in the lull between earnings seasons, but some companies are still sharing their most recent results. Rite Aid (RAD -5.42%) has faced challenges from pandemic-related closures, but its results still made shareholders happier. The same wasn't true for homebuilder KB Home (KBH -1.39%), whose results raised some questions about the health of the housing market.

A clean bill of health for Rite Aid

Shares of Rite Aid jumped 22% Thursday morning following the release of its fiscal first-quarter financial report. Some of the numbers were ugly, but they still pointed to solid future prospects for the drugstore chain.

Rite Aid store location seen from parking lot, with several cars in front.

Image source: Rite Aid.

Rite Aid lost $2 million during the quarter on an adjusted basis, working out to $0.04 per share. That was considerably narrower than the $7.5 million loss in the year-ago period. The company said that it suffered a $30 million hit to adjusted pre-tax operating earnings due to the COVID-19 outbreak. However, revenue for the period was up 12%, with Rite Aid pointing to growth in both its pharmacy services and retail segments. The retailer benefited from a big rise of more than 250,000 members in its Medicare Part D prescription drug plan, and overall same-store sales were up 6.6% on a 16% increase in front-end comps.

It's still uncertain, though, whether Rite Aid's recent success will last. Before the coronavirus pandemic struck, Rite Aid faced tough questions about where growth would come from. Strong demand for cleaning products, sanitizers, wipes, and paper products all helped the drugstore chain boost sales and market share.

Rite Aid stock has more than doubled from its lows last summer, and it's had success with its turnaround efforts so far. Investors need to see what will happen under more normal circumstances before they can feel entirely comfortable with Rite Aid's future.

KB Home sees orders plunge

Meanwhile, KB Home's stock dropped 13%. The homebuilder's fiscal second-quarter results showed the impact of COVID-19 on the housing market, and investors weren't happy with what they saw.

KB Home reported revenue declines of more than 10% for the three months that ended May 31. The homebuilder delivered just under 2,500 homes, down from more than 2,750 in the year-ago period. Average selling prices were also down by about 1%. However, net income held up well, bolstered by positive results in KB Home's joint venture investments. Earnings of $0.55 per share were actually up from $0.51 per share a year ago.

What really spooked investors was a sharp decline in order activity over recent months. Gross orders fell 4% in March, 59% in April, and 42% in May. KB Home said that activity has improved since shutdown orders and business restrictions have eased, but news of rising COVID-19 case counts could make the homebuilder vulnerable if local governments impose similar restrictions again.

Homebuilder stocks have risen sharply despite downbeat data from the housing market and in construction activity. However, today's drop in KB Home stock shows that investors have limited patience. KB Home will have to demonstrate it can turn things around quickly if it wants to prevent further share-price declines.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Rite Aid Stock Quote
Rite Aid
$5.41 (-5.42%) $0.31
KB Home Stock Quote
KB Home
$28.37 (-1.39%) $0.40
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$30,316.32 (%)
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,783.28 (-0.20%) $-7.65
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$11,176.41 (%)

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