There’s no getting around it — 2017 was a disaster for drugstore chain Rite Aid Corporation (NYSE:RAD). The beleaguered organization, along with owners of RAD stock, were counting on a major acquisition from rival Walgreens Boots Alliance Inc (NASDAQ:WBA). When all was said and done though, Walgreens was only allowed to buy less than half the number of stores it intended to acquire when the deal was first announced in October of 2015.
Rite Aid shareholders paid a dear price too, not just because of the shrunken deal, but because during the two years it took to win the Department of Justice’s green light, Rite Aid continued to deteriorate. The RAD stock price has fallen 75% this year so far. Much of that loss came after the Walgreens Boots Alliance was finalized. And this loss is despite a 47% rebound from November’s low.
And it’s that rebound from RAD stock over the course of the past few weeks that drops a curious, almost encouraging hint.
Just to stave off any confusion before it develops, this isn’t a long-term bullish call on RAD stock. The company still has a ton of problems to solve, and while the $4.4 billion Walgreens will be forking over to secure 1,932 Rite Aid stores will provide some much-needed liquidity (and mostly be used to pay down debt), the cash infusion still doesn’t solve the bigger problem Rite Aid has. That is, Rite Aid just isn’t drawing enough customers into its stores and selling them enough goods, translating into paper-thin margins. More cash in the bank doesn’t actually solve that problem.
RAD Stock Picking Up Steam
Still, there’s a near-term bullish trade in the works that ultimately (and perhaps accurately) assumes the bears got a little overzealous in 2017.
And the tide may have officially turned bullish again.
The daily chart of RAD stock below tells the tale. After suffering all the way through November, the stock is starting to test key moving average lines. Namely, shares are once again testing the 100-day moving average line (purple) as a ceiling after briefly poking above that line in late November.
This is the best glimmer of hope we’ve seen from RAD stock in a long time. On more upward thrust could cement the budding uptrend in place. A thrust above the November of high of $2.27 could really fan the bullish flames.
Again, Rite Aid is still in long-term dire straits. But there may be a trade packed in here on the short-term radar.
As for how far RAD stock might be able to climb if and when it gets going, there are two highly plausible ceilings evident on the weekly chart below. The first of them is the 200-day moving average line (green) at $2.64, and the other is a Fibonacci retracement line — a 38.2% retracement of 2017’s tumble — at $4.19. The latter is quite “up there,” to be sure, but big pullbacks invite big reversals.
Bottom Line for RAD Stock
This is a scenario that merits the use of checkpoint target prices. In other words, watch closely if the $2.64 area is tested. Should Rite Aid shares push through that potential ceiling, then the Fibonacci retracement line at $4.19 becomes the next best upside target.
I cautioned above to not read too much into the bullish call. This is only a budding short-term trade and not rooted in long-term factors. Just for the record though, there is a possibility that Rite Aid will combine the cash infusion with Rite Aid with a more serious internal turnaround effort and start to improve the top and bottom lines again. It’s not terribly likely, but it’s a possibility that can’t be ruled out.
Whatever’s in the cards, this is a name where the chart’s ebbs and flows and tendencies are still far more helpful to investors than headlines and quarterly reports are. Plan, and play, accordingly.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.