I want to make the point clear upfront that Rite Aid Corporation (NYSE:RAD) is a fundamental mess. The pharmaceutical retailer lags behind its competitors in terms of revenue and earnings metric; its debt levels ballooned out of control. That RAD can make do without serious outside help sounds like a childhood fairy tale. Yet Rite Aid stock does have potential for the extreme speculator.
Before we get into the crazy stuff, we must establish that RAD stock is a gamble. Like a game of poker, Rite Aid is a tempting combo of psychology, probabilities, and dumb luck. While legitimate bullish arguments exist, the bad and the ugly outweigh the good. And the stark reality is that you’re going to need every positive element to work in your favor to make this bet worth your while.
Rite Aid stock isn’t a great value simply because it’s beaten up. As I’ve argued in several other financial articles, low prices alone don’t imply a solid contrarian bet. Specific to RAD, InvestorPlace contributor Lucas Hahn argued that we should analyze the pharmacy through its enterprise value. The significance of this method is that it “adds a company’s debt and subtracts its cash balances.”
From Hahn’s perspective, we see that RAD stock carries an enterprise value of $9.66 billion. The problem? Rite Aid’s market capitalization is $2.63 billion, or a 267% discrepancy. Both Walgreens Boots Alliance Inc (NASDAQ:WBA) and CVS Health Corp (NYSE:CVS) have much more reasonable variances. Such a wide divergence for RAD hints that this is a cheap company offered at a cheap price.
Speculators should also be mindful about the declining pharmacy retail industry. Since President Trump took office, the producer price index for prescription drug sales dropped 9%.
Opportunities available for RAD stock…If you can Handle the Heat!
Still, if you like high-risk, high-reward plays, then RAD stock is right up your alley. I’m not saying that merely because shares lost 70% year-to-date or that “things couldn’t get any worse.” For the better part of nine months, things certainly did get worse.
Currently, Rite-Aid stock is doing something that it hasn’t done since the first half of 2016 — stabilize. What makes this present round of trading distinct is that RAD found a discernible bottom. On July 13, shares closed at a then year low of $2.23. Afterwards, the bears had three clear opportunities to drop the embattled pharmacy into oblivion.
On July 31 and August 10, RAD stock closed at $2.24 and $2.25 respectively. Later, in the second half of August, bearish traders pounced on RAD. Their “success” was extremely limited. The best they got was a $2.22 close on August 18, not even a half-a-percent decline from the prior low.
Late last month, I warned against taking the bearish bait on RAD stock. The easy, short-side money has already been made. Now, the long hands are building a support baseline. For those that refute the validity of technical analysis, this may sound like mumbo jumbo. But irrespective of your preferred investment methodologies, you have to respect what the markets are signaling.
Moreover, let’s consider the psychology from the other side: Short traders recognize that support is holding strong. Continuing to be bearish could be hazardous to their health. As InvestorPlace’s Joseph Hargett wrote, “With very little room for the shares to decline and plenty of room to rally, these shorts will have to cover sooner or later. And with RAD already eying higher ground, sooner looks more likely.”
Don’t Forget that Rite Aid stock is Speculative
As a nearer-term forecast, I wouldn’t be surprised to see Rite Aid stock jump to a range between $3 to $3.50. Plenty of trading activity occurred between these levels, which would represent a logical bullish target. Should RAD achieve that swing higher — about a 20% to 40% move from its current price — I would take the money and run.
When dealing with speculative trades, the house usually wins in the long run. Presently, the retail pharmacy industry isn’t producing too many winners. Keep in mind that on a YTD basis, Walgreens is down nearly 2%, while CVS is up only 1%. Fred’s, Inc (NASDAQ:FRED) hemorrhaged almost 63%. This sector is hurting.
As such, RAD stock will require serious assistance, the kind that may or may not come. You can make some money playing off the unknown variable, but this market specifically is about survival of the fittest.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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