Rite-Aid's a Prescription for Trouble

CVS (CVS Quote) and a Canadian private investment group had just purchased Eckerd from J.C. Penney (JCP Quote), and competitor Duane Reade (DRD Quote) was taken private for a hefty premium. The speculative forces of the stock market were now taking over and investors, hoping not to miss the next takeover in this sector, quickly bid up Rite Aid.

At this point we ran the company through our test that looks at the financials, management, share price, technical indicators and our proprietary Alpha factor that gauges a stock's ability to make a large percentage gain on news. If there was any potential for Rite Aid to move higher, we didn't want to be left out of the move.

Within an hour of beginning to read up on the drug retailer, we knew something was amiss, and the stock wouldn't be added to the model portfolio. We were concerned by a drop in Rite Aid's same-store sales, while the company's debt ratios were ballooning as it struggled to keep up with larger competitors Walgreen (WAG Quote) and CVS. With a large trading float and minimal short interest, the stock also scored poorly in our Alpha factor. Finally, the new management team, no matter how far removed from the former troubled one, had yet to deliver consistent results and regain the confidence of investors.

Even at current levels, where some investors might be tempted to make a value play in Rite Aid, we believe there are much better names to own in the under $10 space. New readers who may have already been holding on to the stock should use any strength from here to exit out of this name.

P.S. Remember, stocks priced under $10 have the potential to move quickly. So, you might want to get our current recommendations now with a free trial to TheStreet.com Stocks Under $10.