Rite Aid Corporation (NYSE:RAD) stock may have finally hit bottom. After plunging more than 72% since the start of 2017, Rite Aid stock showed signs of life, rising 2.25% last week. It’s not much, but it’s a start, and it might be an indicator that now is the time to think about betting bullishly on the shares once again.
This “new” Rite Aid is slimmer and leaner than the one that started the year … that’s a good thing. The company shed some 2,186 stores back in June, selling them to Walgreens Boots Alliance Inc (NASDAQ:WBA) for $5.2 billion.
This new reincarnation is more nimble, and, more importantly, much more easily acquirable by another company — Amazon.com, Inc. (NASDAQ:AMZN) comes to mind as the company has shown interest in moving into brick-and-mortar locations for distribution purposes.
Sans a buyout deal, however, most investors believe Rite Aid just can’t hack it. After all, how can a company with half the store locations it had at the start of the year compete where its larger self could not?
It all boils down to paying off debt (with the Walgreens’ cash), and restructuring the company into a more profitable operation. My colleague Josh Enomoto recently provided a more in-depth look that’s worth reading.
Click to Enlarge Aside from the company’s long-term prospects, there are short-term reasons to bet bullishly on RAD as well. As I noted above, RAD stock is in the process of rebounding off all-time lows near $2.20, with the shares rallying more than 2.25% last week.
Today’s global market malaise aside, if RAD can gain some momentum, these beat-down shares have plenty of room to run before hitting technical resistance — which lies more than 10% overhead in the $2.50 region. The area is also home to RAD’s 50-day moving average.
Sentiment will be an important factor in any RAD rally, and there is plenty of potential sideline money to be had. First, Thomson/First Call reports that only one of the seven analysts currently following RAD stock rate the shares a “buy.”
Additionally, the 12-month price target rests at $2.55. Both indicators have room for growth.
Second, short interest has built to an unsustainable level on RAD stock. With the shares trading near all-time lows this month, the number of RAD shares sold short jumped by 9% in the most-recent reporting period. Now totaling about 125 million shares, RAD short interest accounts for more than 12% of the stock’s total float.
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.
Turning to RAD options, activity is rather typical for a low-dollar stock. Options activity may appear quite bullish for RAD, with the September put/call open interest ratio languishing near 0.09, but call options are typically quite popular on dollar stocks.
The reason for this is that there is much greater room for a rally than there is for the shares to decline. After all, zero is not that far away right now for RAD. This is also the same reason why short sellers will find it increasingly difficult to profit from their RAD positions.
As for implieds, September options are pricing in a potential move of nearly 6% for RAD stock. This places the upper bound near $2.40 and the lower bound at $2.12.
2 Trades for Rite Aid Stock
Long Call: In the current bearish sentiment environment, any positive news from Rite Aide could provide a considerable boost for the shares. What’s more, RAD stock is already showing signs of wanting to rebound and move higher.
While this is a risky play with such a low-dollar stock, the benefits could be just as rewarding. If you’ve got the risk tolerance, an Oct $2.50 call has potential. At last check, this call was asked at 18 cents, or $18 per contract. Breakeven lies at $2.68, while a double on the trade would be realized if RAD closes above $2.86 at September expiration.
Put Sell: For a more neutral-to-bullish play, the Sept $2 put sell has a good chance of finishing out of the money. At last check, this put was bid at 7 cents, or $7 per contract. In this trade, you keep the premium as long as RAD stock closes above $2 when September options expire.
On the downside, if RAD trades below $2 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $2 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
