The good news is that shares of Rite Aid (NYSE:RAD) stock are up 12% after reporting third-quarter earnings. The less good news is that the stock has dropped about 8% from its post-earnings high. And RAD stock is still down approximately 11% for 2021.
Still, investors see RAD stock trading near the low end of its 52-week range. And with the company reporting a surprising profit along with announcing the planned closure of over 60 locations, it’s fair to ask if Rite Aid is a sneaky buy.
At this time, we feel that’s a tricky proposition. The company is still carrying a significant load, and that’s not likely to change that much even if the store closures happen as scheduled.
Defense Wins Championships, Not the Hearts of Investors
Many of us are familiar with the expression defense wins championships. That’s often the case when it comes to sports. In investing, playing defense can produce a momentary lift for a stock. However, successful investors know that defense only gets you so far. At some point, you have to prove that you’re generating revenue and earnings.
When reporting earnings, Rite Aid announced it plans to close as many as 63 stores in the coming months. The process is already underway, and when it’s complete, the company expects to pad its EBITDA by $25 million.
That’s undoubtedly the primary reason RAD stock is getting a lift after earnings. But as the stock starts to fall back, it’s a reminder that defensive measures only go so far. At some point, investors will want to see the remaining stores generate the revenue that will allow earnings to come organically.
Not a Meme Stock, But Short Interest Remains High
Another reason we hesitate to look at Rite Aid as an undervalued stock is because of high short interest. As of this writing, RAD stock has a short interest ratio of over 22%. By itself, a high short interest ratio may not mean that much. There’s some chatter among traders hoping for a short squeeze as traders must cover their short positions.
The meme stock movement has proven that this can be an effective trading strategy. But that doesn’t make it a sound investment strategy. And that’s why you should be cautious before taking a position in RAD stock.
Two Stocks We Like Better
To be fair, drug store stocks as a sector have underperformed the broader market. However, with the need for COVID-19 testing and vaccinations to remain on the front burner, the next quarter could be a strong quarter for these companies.
With that in mind, we encourage investors to consider CVS Health (NYSE:CVS) and Walgreens Boots Alliance (NASDAQ:WBA) as solid options. CVS stock is up 48% for the year, and WBA stock is up 26%.
Both CVS Health (900 stores) and Walgreens (200 stores) are also in the process of executing store closure initiatives. However, both companies have better balance sheets than Rite Aid.
Based on the 72% gain in its stock price since the onset of the COVID-19 pandemic, we give CVS stock the nod for growth investors. The company is rethinking its in-store experience with its HealthHUB concept that provides options for patients who are managing chronic health conditions.
We see it as giving consumers a reason other than price, and that’s always a bullish catalyst. The company expects more than 1,000 of these stores by the end of 2021. And for value investors, both Walgreens and CVS offer similar dividends, but it’s hard to beat Walgreen’s track record of increasing its dividend for over 45 years.