"Rite Aid Corporation operates a chain of 3,821 (as of 2/27/99) retail drugstores in 30 states and D.C. The Company also engages in pharmacy benefit management and other managed health care services. For the 26 weeks ended 8/28/99, revenues rose 18% to $7.13B. Net income totalled $27.9M vs. a loss of $21.6M. Revenues reflect an increase in same-store pharmacy sales. Earnings also reflect decreased store closing costs", according to Market Guide Snapshot. The company also has new management in place to work it out of the accounting irregularities they had suffered from.

The above chart of Rite Aid (RAD) shows a clear downtrend until recently, when the price broke above the downtrend line in early December. While the abated selling may have been partially due to the end of year end tax loss related selling, prices have been moving sideways in a potential basing pattern ever since.

Chart Analysis: The bottom indicators recently became oversold, with RSI moving sideways in what also looks like a basing pattern. An upturn should signal the beginning of a price recovery. Stochastics are trying to turn up but have stalled recently, still near oversold territory, and the bottom Rate of Change Indicator (ROC) has been improving against the price retracement back toward the recent lows. This is considered a bullish divergence.

Elliott Wave & Technical Analysis: The Wave structure still allows for one last new low, but for individual stocks, 5^th waves often fail to follow through, making a higher secondary low, ultimately confirming the low once the price makes a new recovery high. We think there is a good chance for this here, especially since there is already a minor 5 wave decline within the larger 5 wave pattern. Another point to be made is the upside breakout of the apex of the descending diagonal triangle pattern that is drawn on the chart. This pattern offers one of the highest probabilities of all technical patterns that we know of as a predictor of the termination of the trend. A break to a new recovery high would confirm that the trend had indeed turned bullish. Another strong sign is that the insiders are accumulating with 7 buyers and 0 sellers (according to the Insiders Publication).

Balance Sheet Fundamentals:

As you can see, the stock appears cheap based on fundamental measures, selling below its book value, at a very modest 10 times earnings, it offers a 6.46% dividend yield while waiting for it to recover. We also make note of the VERY low Price/Sales Ratio which indicates that strong sales should generate higher future earnings.

In summary, we see this as a perfect January Effect, small stock recovery candidate that has the potential to recovery even if the market itself continues to decline. It should at least have limited risk against that of the overall market. Accumulate below 7.

Best Regards,

Mitch Harris, RIA

Editor, The Reality Check Newsletter

Registered Principal, Market Trend Realities