There’s no getting around the fact that that, on the whole, the effort from Walgreens Boots Alliance Inc (NASDAQ:WBA) to acquire the bulk of Rite Aid Corporation (NYSE:RAD) has been a colossal frustration, including for owners of WBA stock.
When first announced back in October of 2015, Walgreens Boots Alliance was aiming to spend $17.2 billion in a maneuver that would catapult the combined outfit ahead of the nation’s biggest chain, CVS Health Corp (NYSE:CVS), offering $9.00 per share of RAD stock.
By the time the deal won approval though, the offer was pared back to only $4.4 billion and a mere 1932 Rite Aid units, or roughly half the number it would have garnered with an outright acquisition.
One would have thought that news, made official in September, would have put an end to the tumble WBA stock was suffering leading up to the finalization of that news. It wasn’t though. The stock continued to slide all the way through late October, with the last leg of the selloff in response to news that it would take three years and $750 million to rebrand those Rite Aid units.
It was salt in the wounds that patient owners of WBA stock just didn’t need, leaving them wondering if the whole thing was nowhere near being worth the trouble.
Thing is, as painful as the journey has been, the climactic that unfurled in late October when the most recent bomb was dropped on investors also screams that the worst is in the rear-view mirror.
In fact, since then WBA stock has crawled back above a critical long-term moving average line, signaling the beginning of a new uptrend that’s surprisingly well supported by the company’s fundamentals.
Now That’s a Capitulation!
If you’ve heard the word “capitulation” but have never been quite sure how it applies to trading, emblaze the chart of WBA stock below into your brain as a pretty good (though not necessarily perfect) example of a capitulation.
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The capitulation in this case, as it is in most cases, is marked by a steep selloff in conjunction with a spike in volume. It’s a sign that most interested traders have simultaneously thrown in the towel. Once the last of the faithful owners are flushed out en masse, the only people left in the mix are the bulls and potential buyers.
And as a look at the weekly chart tells us, those bulls and buyers are indeed coming out of the woodwork. Note the height of the bullish volume bars we’ve seen since the plunge hit a bottom in late October.
Though the selling volume in September and October was above average, the volume behind the rebound in the meantime has been (on a sustained basis anyway) greater still, suggesting there are more buyers than sellers on the way back up.
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It all bodes well for the stock’s foreseeable future.
Looking Ahead for WBA Stock
It’s not the way it’s “supposed to be.” Investors were counting on the originally-planned deal with Rite Aid rather than the shrunken deal, and it was expected (for some reason) to not take three years and three-quarters of a billion dollars to complete the rebranding effort. All the headlines say WBA stock holders didn’t get what they wanted.
Yet, there it is. The stock is rising, in earnest. What gives?
Chalk it up to another situation where investors were doing one thing, but were subconsciously thinking another; perhaps superficially led by some dramatic and occasionally dire headlines implying anything less than a full acquisition wasn’t palatable.
With the dust settling, the market’s starting to remember this is a company on pace to grow the bottom line by 9% this year, and expected to grow its bottom line by almost 10% next year. Not bad. Never even mind the fact that a bigger Walgreens and smaller Rite Aid will still leave Rite Aid fighting a losing battle.
Often times it takes a complete capitulation to shock investors into realizing the deal they got was still a very good deal, regardless of what the headlines suggest. That sure looks like what’s panned out here anyway, given the chart’s change of heart. Let’s take the clues at face value.
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.
