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Sometimes stocks stay in the single digits for so long that they become tempting buys. But you should curb the urge to buy long enough to do some careful research. Sometimes a low stock price creates opportunity, but more often than not, the stock is down because the market is pricing in realities that have yet to surface.

The latter appears to be what's happening with the country's third largest drug-store chain,

Rite Aid

(RAD) - Get Rite Aid Corporation Report

. The retailer has a colorful history of corrupt insiders and shady accounting and it now finds itself trying to generate sustainable growth following a round of industry consolidation.

Rite Aid shares rallied 33% over the past year but have slid 26% in 2004 since hitting their December highs. Investors had speculated the company could be the next takeover target after

J.C. Penney's

Eckerd division was sold to CVS

(CVS) - Get CVS Health Corporation Report

and a Canadian drug store chain, and

Duane Reade

(DRD) - Get DRDGOLD Limited Sponsored ADR Report

was bought out by a group of private investors.

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An acquirer has yet to come calling for Rite Aid, and with investors focused solely on the company's business prospects, the future does not look as bright as it once did.

In all fairness, management has tried to improve the business, but has fallen way short of its competitors. Rite Aid's total sales grew 5.1% in fiscal 2004, up from 4.1% top-line growth in fiscal 2003. Compare this to CVS, where sales increased 10% in 2003, and



, which reported a sales increase of 13% for the same period, and the differences in growth are obvious. One-time events like the grocery strike in California and the strongest flu season in years contributed to Rite Aid's sales increase, and the company did say it managed to hold on to a large share of the business it grabbed from the strike.


proprietary screening model, Rite Aid doesn't score well in its fundamentals. The company has failed to reach the 6% level in same-store sales growth for the last three months, while WalGreen has successfully hit double digits in each of the three months. With $4 billion in debt and a consolidating industry landscape, Rite Aid may have a hard time keeping up. Rite Aid spent $313.5 million last year to service its debt load, putting a further dent in its earnings power going forward.

Rite Aid is also a disaster in our alpha-factor category -- the potential of a stock to surge.


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is a growing player in this space and with more prescriptions being filled online, competition is as tough as ever. CVS and Walgreen are expected to expand operations in California, where Longs and Rite Aid currently hold the top two spots. Although Rite Aid is looking to open 75 stores in the coming year through a mix of relocation and new-store construction, Walgreen plans to begin construction on 400 new stores and CVS on 200 during this same period.

Not exactly the dynamic to warrant a premium valuation here. So the company is struggling, but what about the stock? Priced at less than $5 a share and with $16.6 billion in sales last year, maybe there is some value there, right?

Wrong. When Duane Reade announced it was being bought last December at 10 times enterprise value to estimated EBITDA, the industry benchmark, Rite Aid shares quickly traded up to 9.5 times EV/EBITDA. But the stock has since declined to 7.8 times EV/EBITDA, in line with industry leader CVS, which has grown sales at close to 11% over the past five years, more than double the rate of growth turned in by Rite Aid.

With no catalyst on the horizon to spark top-line growth and limited capital to defend its industry position, another run-up in the stock price does not appear likely. Short interest represents only 2.9% of the float, limiting the impact a short squeeze could have, making this stock best avoided here at $4.64. And if you do own it, it is an ideal candidate to sell to raise some cash. There are better opportunities out there.

This article was written by Stocks Under $10 Investment Team, David Peltier and William Gabrielski.