Rite Aid: This drugstore stock is still under the weather

— -- A: Rite Aid is one of those stocks investors think should do better than it does.

There are Rite Aid drugstores everywhere, the population is aging, so demand should be strong. Trust me, I've heard about every bullish case made for this stock by investors who buy it cheap and hope for a turnaround. Still, the stock is about even with its 1981 price. Not good.

Readers ask about Rite Aid stock constantly, though. I've written about it twice, both lukewarmly. My previous columns discuss the company's long-struggling stock, its bout with accounting problems and general competitive problems in an extremely crowded industry.

But, it's been two years since we've run the stock through the four steps we consider here. So, here goes:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Rite Aid's trading history back to 1981, we see the company generated an average annual compound rate of return of 15%, mostly due to large returns between 1993 and 1998. That is a decent return and about 50% greater than the long-term average annual return of the Standard & Poor's 500 index.

But to get that return, you accepted considerable risk — standard deviation — of 52 percentage points. That's 170% greater than the S&P 500's long-term risk. That's tremendous risk and far exceeds the extra return you may expect to get.

Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs. When we run Rite Aid's stock, we find it's rated "dangerous." In other words, the current stock price is much greater than what the company is expected to generate in cash over it's lifetime. If you're looking for a bargain, you're not getting it with Rite Aid at these prices.

Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. If the analysts are right, and the company grows 7% a year the next five years, that would put the stock in the "sell" range. That's a red light for investors who think the price-to-earnings ratio will return to historical norms.