If you were to tell me that Rite Aid (NYSE:RAD) is the most disappointing name in the markets today, you won’t get much argument from my end. To paraphrase that Dos Equis guy, I don’t always look at the RAD stock price. But when I do, it’s usually down.
And this year is turning out to be no exception. Against January’s opening volley, Rite Aid stock has lost more than half its value. Since early 2017, shares have largely charted an ugly bearish trend channel. There was a nine-or-so-month span — between November 2017 through early August 2018 — when shares ticked higher. Obviously, that respite from the volatility did not pan out.
Technically, this is what worries prospective speculators regarding the RAD stock price. At any time, the fundamentals can disappoint the markets. When they invariably do, the resulting selloff is fast and furious.
That said, the most recent earnings report for the first quarter of fiscal 2020 produced an anomaly. As usual, the underlying company stunk up the field. Against a consensus per-share profitability target of a loss of 8 cents, actual earnings per share came in 14 cents in the red. Moreover, Rite Aid also missed its revenue forecast of $5.38 billion. Instead, it delivered $5.37 billion.
But following the Q1 disclosure, the RAD stock price surged 24%. Why? A fresh deal with Amazon (NASDAQ:AMZN) gave beleaguered stakeholders hope for a substantive turnaround.
On the surface, I can see why investors were excited. Under this partnership, Amazon customers can go pick up their orders at participating Rite Aid stores. But with Rite Aid stock having lost all that enthusiasm, is it worth the risk?
Amazon Deal Provides an Intriguing Case for RAD Stock
My InvestorPlace colleague Will Ashworth takes a very cautious approach with Rite Aid stock. I don’t blame him. Indeed, I’m sure that most people follow his thinking.
To summarize, RAD stock is a boring investment: mostly, it sells medication for sick people, along with the occasional candy bar. The company has no business absorbing the kind of red ink that it did, including an operating loss that jumped nearly 80% year-over-year to $92.0 million.
Regarding the Amazon deal, Ashworth believes it will help Rite Aid. However, because people have already spent their money on their Amazon order, a residual sale is unlikely, leading Ashworth to comment, “I just don’t think it will benefit nearly as much as people imagine, and that’s negative for RAD stock.”
Logically, I understand his point. Still, I think the Amazon deal is incredibly symbiotic for Rite Aid stock for one key reason: demographics.
Most Rite Aid shoppers are 55 and older, and make less than $40,000 a year. On the other end of the spectrum, Amazon shoppers are young, tech savvy, and make serious bank. With the Amazon Counter program, Rite Aid will get foot traffice from a previously untouched demographic.
And this demographic reality counters a point that Ashworth made: the typical Amazon customer will probably make that secondary or residual sale … depending on how Rite Aid displays its counter merchandise.
Plus, let’s consider the most obvious element here: Rite Aid will potentially see a wave of non-typical customers in their store locations. That gives management an opportunity to sell their brand to a younger and upwardly mobile audience.
Granted, this is a long shot. But I wouldn’t give up on Rite Aid stock yet, not when it’s getting interesting.
Short-Term Trade Idea Is Viable
If the Amazon deal only brought retirees on a fixed income to Rite Aid, I’d wholeheartedly agree with Ashworth; these types of shoppers won’t much benefit RAD stock.
But in many ways, the Amazon shopper is the exact opposite of the Rite Aid customer. So, the bullish argument doesn’t necessary revolve around the deal; instead, it’s what management can do with this groundbreaking opportunity.
Now I don’t think it’s a coincidence that Rite Aid stock bounced off support at the low $6 level. Sure, the enthusiasm over the Amazon Counter locations ultimately didn’t work out. I believe many investors got cold feet.
However, the markets are still giving management a chance here. That’s why shares haven’t fallen off a cliff. Therefore, if you’re risk tolerant, a measured short-term bet on RAD stock isn’t as crazy as you might think.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.