The institutions have helped to indicate a bottom in Rite Aid Corporation (NYSE: RAD) shares, not so much because of their buying but the opposite. The institutions had been heavy buyers all year despite the downturn in the price action, but that changed in Q4. In Q4 a broad array of sell-side institutions began selling in earnest and what appears to be capitulation.
Capitulation because it just so happens the FQ3 2023 earnings report is better than expected and has the stock up strongly because of it. Add in the higher-than-average 16.5% short interest, and there is a chance this stock could see a very big pop in the near term. The question for investors is whether this bottom can hold and where the market will go. As it is, the institutions own about 60% of the stock; if they start buying again, Rite Aid shares could easily double over the next few months.
Rite Aid Is Coming Out Of The Woods
Rite Aid has been struggling with growth and profitability for a long time, but it appears to be coming out of the woods. The Q3 results are not without their negatives, but the general take is that business is better than expected, the outlook remains favorable, and losses are narrowing due to company efforts.
The $6.08 billion in revenue is down YOY, but that is against a very tough comp; the takeaway is that revenue beat the consensus by 230 basis points and the strength carried through to the bottom line in spades. On a segment basis, the pharma segments shrank versus last year due to a decline in COVID testing but all other categories improved.
Turning to the margin and earnings, margins remain negative due to restructuring charges and investment in the turnaround, but there is good news to be had. The first is that net losses came in less than expected and resulted in adjusted EPS of -$0.14. This is $0.17 better than expected, and the guidance calls for more of the same. Regarding the guidance, the company lowered its targets for revenue and raised the outlook for capital losses in F2023 but to levels that are still above the consensus. There is an expectation for positive FCF as well.
“In addition, we are kicking off a performance acceleration program, which allows us to fast-track initiatives that will improve sales, script volume and operating margins and free up cash. We look forward to updating you on our progress at year-end,” said Heyward Donigan, president and chief executive officer
The Analysts May Help Rite Aid Bottom
Not many analysts are rating Rite Aid now, and that statement is an opportunity. Only two current ratings were going into the Q3 results, and they had the stock pegged at Reduce with a price target that implied fair value at pre-release price levels. Now, with the results better than expected and the outlook brightening, the analysts may begin to take notice. The best-case scenario would include some upgrades and increased price targets, but any positive commentary and attention will help put a solid floor in the price action.
The Technical Outlook: Rite Aid Is Bouncing From Historic Lows
The price action in Rite Aid shares hit a historic low ahead of the Q3 release but began to bounce even before the news was released. Now, the stock is up more than 10% off that bottom and showing signs it will continue moving higher. The next major hurdle is the short-term EMA near $5; if the market can get above that level, a move up to the $6 and then the $7 level could easily follow.
