What's the first thing that pops into your mind when you think of low-priced stocks? I know for myself, I think of untested, start-up companies that are full of promise, as well as risk. Generally trading on future promise, a strong management team and investor hype, many companies with stocks under $5 per share never grow into profitable long-term investments.
Start-up high-tech and biotech firms are the companies that typically fall into this category. One rarely thinks of an over 4,600-unit, brick-and-mortar consumer chain with stores across 31 states. However, this is exactly what my breakout stock screener recently discovered.
Fully expecting the price chart to belong to one of the typical low-priced suspects listed above, I was surprised to see that it belonged to household name Rite Aid (RAD).
Rite Aid was founded in 1927 and is the third largest drugstore chain in the United States. Once upon a time it was a nearly $50 stock, but it was knocked down into the low-priced world due to a heavy debt burden and intense competition from CVS Caremark (CVS) and Walgreen (WAG).
RAD traded below $0.50 in 2009 from a high around $6.50 in mid-2007. Compare RAD's chart to WAG and CVS, which never dropped below $20 and are currently both trading above $50.
The good news is RAD has rallied over 250% this year on positive results thanks to improving margins based on a changing cost structure. In addition, and perhaps most critically, Rite Aid is refinancing its debt to reduce interest expenses. And the company is acquiring new stores and remodeling existing locations to better serve customers.
For the recently reported second quarter of fiscal 2014, analysts were expecting a loss of $0.04 per share. Rite Aid surprised with earnings per share (EPS) of $0.03, up from a loss of $0.05 in the year-ago period, on a 1% increase in revenue to $6.28 billion. Margins expanded from 27.5% to 28.9% year over year.
These improving results have pushed shares close to the $5 mark. This is often thought of as the magic number on Wall Street due to the fact that most mutual funds are prohibited from buying shares that trade under $5, as they are considered overtly risky.
This could be the catalyst for continued upward momentum in RAD. Once shares hold above $5, the price and improved results should attract big money institutional players, pushing shares higher. In addition, takeover rumors are circulating, which should also serve as bullish fuel.
Recommended Trade Setup:
-- Buy RAD on a daily close above $5
-- Set stop-loss at $3.90
-- Set initial price target at $9 for a potential 80% gain in six months