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Why Rite Aid Corporation Shares May Keep Rising

By Brian Pacampara – Mar 12, 2014 at 11:10AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

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 (RAD -5.41%) 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.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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