If I was a high-roller playing at Wynn Resorts, Limited (NASDAQ:WYNN) or MGM Resorts International (NYSE:MGM), I might consider the occasional, speculative bet. But if the gamble was for something more significant — say, a kid’s college education — I’d think twice. Hence, my hesitation to call Rite Aid Corporation (NYSE:RAD) anything but a long shot.
I certainly can understand the bullish appeal for RAD stock. As a technicality, Rite Aid can still be bought out by Walgreens Boots Alliance Inc (NASDAQ:WBA). InvestorPlace’s Vince Martin states “That deal would value RAD stock at $6.50 per share (at least), implying roughly 70% upside.” Unless you’re an investor in cryptocurrencies, such energetic bursts over a short period of time is unheard of.
Therefore, the contrarian trade makes a lot of sense, if you can stomach the risk.
If you’re especially feeling lucky, you could buy some out-of-money calls on Rite Aid stock. If WBA makes the move, you’re obviously looking at gains well beyond the implied 70% swing. Of course, if you’re wrong, such a “RAD” directional bet will likely leave you with nothing.
This is where the palms get a little sweaty. If you mitigate the risk on Rite Aid stock by betting small, your potential reward is clearly lessened. If you go too hot, you may have some explaining to do with a significant other.
To me, it all goes back to one question: how likely is this RAD stock buyout?
Plenty of Roadblocks for Rite Aid Deal
According to Mr. Martin, the odds are not favorable. He writes that “Rite Aid itself is coming off a weak FY2017, where same-store revenue declined and profits fell further. There’s a chance this could work out for RAD stock holders, but it’s not likely. And, even with Rite Aid stock falling in trading Tuesday, the stock looks like a gamble at best.”
I’m sure that Walgreens is second-guessing its strategy on RAD stock given the recent news. An even bigger problem is that the retail pharmacy industry is declining. Fred’s, Inc. (NASDAQ:FRED) is not performing to expectations, which is not helpful in convincing federal regulators that a Rite Aid buyout won’t negatively impact competitiveness.
Indeed, I find disappointing news in the pharmacy sector hardly surprising. When I last wrote about Rite Aid stock, I mentioned that drug stores as a whole were facing substantial headwinds. In particular, the retail prescription business are facing lean times since the election victory of President Donald Trump.
The irony, as I mentioned at the time, is that the president’s regulatory stance was net-positive for RAD stock. However, the ongoing drama in Washington — a dynamic Trump promised to eliminate — is clearly hurting pharmacies.
All told, as InvestorPlace feature writer James Brumley indicates, the Federal Trade Commission is unlikely to approve the deal. The FTC is going through an internal transition, and requires at least one more voting commissioner to authorize a decision. However, “the remaining two of the five commissioners involved in the decision have already made it clear the FTC is concerned about culling too much competition.”
RAD Stock Is Garbage Without Walgreens Merger
Of course, we’ve seen some low-probability events surprise everyone, not the least of which is the presidency. But let’s just assume that the FTC decision will align with the current sentiment: does RAD stock stand a chance going solo?
Here, we can be a little more frank. All Rite Aid is doing with their recent financial performances is plugging holes in the ship. The problem, of course, is that RAD needs an entirely new hull. Without it, we’re simply delaying the inevitable.
As Mr. Brumley rightfully states, “Aside from the fiscal Q4 beat, there’s not much else praise-worthy about the recently completed quarter. The company earned six cents per share in the same quarter a year earlier, and same-store sales fell a pretty hefty 3%, extending a long-standing streak in shrinking margins despite modest revenue growth.”
The pharmacy retail sector, as previously mentioned, is hurting. Clearly, this is reflected in the technical charts.
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If you stripped away the Rite Aid name, and simply looked at RAD shares from a purely technical perspective, few would think about jumping onboard, even as a speculation. Any support or reversal signals would be fictions of your imagination. What we’ve learned is that adding the Rite Aid name back in doesn’t help matters. And that’s why I’m still bearish.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
