A Look Back at Two $1.40 Stocks to Reach $2.00

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Back towards the end of December I wrote an article that looked at two stocks priced at $1.40, and made a prediction that both would cross $2.00. Now, after three months, one stock is at $1.85 and the other is still stuck around $1.40. Therefore, I am reassessing the positions to determine if either can or will make it to $2.00.

Rite Aid (NYSE: RAD)

The big winner of the two is Rite Aid.  After touching $1.90 last week, it has found support around $1.85. Back in December I looked at the stock following its first quarterly profit in several years, therefore showing that its restructuring efforts had been effective. Since that point, the stock has consistently trended higher and has shown no signs of slowing down.

After a three month return of 80% I believe that shares of Rite Aid are just warming up. The company is still deeply undervalued compared to its competitors Walgreen and CVS Caremark. Rite Aid continues to close ineffective stores, remodel other stores, and restructure the operations of its entire business. With generic presence continuing to rise, a price/sales of just 0.06, and eight consecutive quarters of increased adjusted EBITDA, this is a stock with a great opportunity to trade higher.

While I do anticipate Rite Aid to trend far above $2.00 and ultimately higher until reaching $6.85 by the end of 2015 (click here to read about it), I do think it could encounter some short-term resistance. If we look back over the last four years, Rite Aid has reached $2 on two different occasions, and both times it quickly reversed back to $1.00. Therefore, because of these past trends there will be some fear and uncertainty as this psychological point-of-resistance is approached.

 The difference is that now the company is seeing the signs of recovery, rather than being in a recovery. It just reported its first profit of the last four years, and if analysts are correct, then the company’s strides for improvement will ultimately result in full-year profitability, next year. In my opinion, a price over $2.00 is inevitable, with the stock being so cheap, but the question is when will it occur?

Alcatel-Lucent (NYSE: ALU)

Alcatel-Lucent is a stock that will drive you crazy with its volatility, but one that continues to remain promising. Back in December, the stock had just popped after announcing a restructuring program, funded with $2 billion from Goldman Sachs. However, the stock has since traded in a very volatile manner, and back down to near-even.

The difference between Alcatel-Lucent and Rite Aid is that Alcatel’s news was speculative, while Rite Aid’s was fundamental, and fundamental news always has a longer impact. However, Alcatel’s stock driving news has since turned into fundamentals, as the company looks to downsize its business by divesting and selling unprofitable segments.

Most don’t realize the pure size of Alcatel’s business, because of its $3.30 billion market cap. However, this is a company with almost $19 billion in revenue, and operates in a segment where most companies trade at 1.50-2.00 times sales. Therefore, if Alcatel had the 10% operating margins that other companies such as Juniper and Ericsson trade with, it would be a $30 billion company. As a result, I am very optimistic about the company’s opportunity to unload the junk and to then focus on the gems of its business.

This is a company with several segments of growth that produce great margins. Therefore, even if Alcatel loses half of its business, it would still be worth $15-$20 billion if margins become equal to the industry average. The problem is that this will not occur overnight, and it will be a long and volatile road, but one that I believe will produce a $2.00 stock price by the end of this year.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I present a dozen traits that you want to find in a good value investment. These traits are then broken into “purpose” within your portfolio, as a high yield growth stock would require different indicators compared to a small cap speculative investment. Both Rite Aid and Alcatel-Lucent fall into the category of small cap and speculative, but are operationally large and are very close to reaching profitability. The key is that both companies notice their problems, and are taking strides to improve. This improvement, in my opinion, will ultimately lead to gains, and a price far above $2.00 per share. 


Brian Nichols has a position in Rite Aid and Alcatel-Lucent. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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