Rite Aid Corporation (NYSE:RAD) has been absolutely decimated this year. So far, RAD stock is down a whopping 78% in 2017. At the beginning of the year, it was in a buyout agreement with Walgreens Boots Alliance Inc (NASDAQ:WBA). RAD stock was trading over $8 per share at the start of the year, but is under $2 at the moment. Of course this is disappointing to a whole host of investors. Any day now, the deal will go through they thought (and hoped).
But that deal didn’t go through, despite some 20 months of headaches. The previous deal involved WBA buying all of RAD and spinning off more than 1,000 locations to Fred’s, Inc. (NYSE:FRED) to appease regulators. Shortly after it fell through though, WBA offered another deal with Rite Aid. Instead of buying the entire company, WBA now plans to acquire almost 2,000 locations for $4.38 billion. This is on top of the $325 million termination fee that WBA is paying RAD.
Back in August, I wrote that I would rather pay a premium for a good company than a discount for poor one like Rite Aid. That said, there could be value in the drug store retailer should its new deal with Walgreens go though (and it’s been approved).
Rite Aid will be left with just over half its locations and can pay down an absurd amount of debt. Management says it will be left with some of its best-performing stores. By remodeling the stores and slashing overhead, perhaps Rite Aid can dig itself out of this hole.
What About RAD Stock?
For as much as I have had a preference for other companies, a trade did set up nicely in RAD stock for the speculative investor. The $2.20 level had big-time support. But as they say, the more times a stock tests a level of support or resistance, the more likely it is to break.
That’s exactly the case with RAD stock, as it went right through $2.20 after earnings in late-September. The next day, shares were between $2 and $2.10, telling investors they should bail if they’re long. That would have allowed many to get out (as my trade outline had said) with minimal losses. Instead, shares ultimately fell to $1.63 and now rest at just $1.79.
Some investors are now undoubtedly asking themselves, “Should I buy Rite Aid stock?”
I can’t say that the answer is yes unless some things start to go RAD’s way. Without question, I know the WBA deal is its ultimate savior. If that deal closes, RAD has a chance, although it is far from a guarantee, to revitalize itself through a balance sheet overhaul. While sales are shrinking, down about 4% year-over-year last quarter, its net income is hanging in there. Still, with a debt load north of $7 billion, it’s just too much of a burden for this $1.94 billion market cap stock.
It needs reprieve and it comes in the form of a partial WBA buyout. The buyout is really just the M&A form of a bailout. Without WBA, RAD would have to undergo its own restructuring, likely involving some form of bankruptcy protection. It just doesn’t have the financials to justify its current structure.
The Bottom Line on Rite Aid
So what do investors do? The buy-and-hope strategy might work from time to time. But it’s only consistent theme is broken hearts and empty wallets. RAD stock may not be any different. I wouldn’t buy Rite Aid yet, given the current RAD stock news. Instead, let’s wait for a couple of things.
First, let’s see if the WBA deal ultimately goes through, and it should. If it does, there is light at the end of the tunnel and Rite Aid actually has a chance to turn things around. From an operational standpoint, RAD’s not great, but it’s far from a disaster. Its financial structure is the real culprit here.
The second catalyst sort of depends on the first. Or at least, it might. I don’t want to be a buyer of RAD stock unless it’s able to get above $2.20. If it can reclaim that level and hold it, speculative investors can justify a position in Rite Aid. A close below $2.20 should be the stop-loss. Otherwise, buying now is a buy-and-hope strategy. Even though shares are just $1.80, they could go to $0. Without discipline we’re left with nothing.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
