Rite Aid (NYSE:RAD) was left for dead, as shares tumbled lower and lower. The idea of a Walgreens (NASDAQ:WBA) buyout buoyed shares for a while, but ultimately RAD stock bumbled lower until it was below a buck.
Management orchestrated a reverse split, helping to manufacture a higher stock price to avoid delisting from the exchange.
Rarely do these types of splits pay off, but this move appears to have worked for the time being.
After the company’s most recent earnings report, shares of Rite Aid were ripping higher. The stock squeezed from sub-$8 to more than $20, topping near $24. Shares then retraced back down toward the $10 to $12 zone.
Because of that retracement and where prior support levels have kicked in, Rite Aid is — surprisingly — looking attractive on the long side. Let’s look.
Trading RAD Stock
As you can see on the daily chart, Rite Aid exploded higher in December, gapping up from $8.36 to $11, and then doubling from that open five sessions later. The move is pretty spectacular, even if you’re not a fan of the company.
Rite Aid shares still carry a short interest of 33.8%, as investors remain skeptical. However, for those looking for a speculative long position, RAD may offer an opportunity. So long as shares stay above that gap-up level at $11, it looks okay on the long side.
Admittedly, the series of lower highs is discouraging (blue line), as is the fact that shares are below the 20-day moving average.
However, buyers continue to step in when shares dip into the $11 range and are holding up above the 50-day moving average. I typically do not like such a setup and must emphasize that I consider Rite Aid a high-risk play.
That said, it if can hold up over $11 and regain some momentum, $14 is a possible upside target. Above that and shares could really start to squeeze higher, with $17-plus being a possibility under the right market conditions.
Now all of this comes with the caveat of the broader market. Should the S&P 500 correct over the next several days or weeks, I have my doubts that Rite Aid will be the flight-to-safety to trade for investors looking at quality assets.
So in order for Rite Aid to have a chance, we need to see the overall market hold up as well.
Not All Is Well, Though
While the charts look primed for more potential upside, that doesn’t mean all is well. In fact, the business is still very much in a questionable state, as long-term concerns remain. In essence, one-quarter of business doesn’t change the landscape for Rite Aid.
Last quarter the company was able to generate a positive net income, which created a squeeze in the share price. While Rite Aid raised its full-year profit outlook, they still expect to lose between $174 million and $204 million for the year.
Current assets outweigh current liabilities $4.21 billion to $2.88 billion. The coverage here isn’t great, but it suggests the company shouldn’t have a problem covering its short-term obligations. Longer-term, total assets of $10.4 billion barely edge total liabilities of $9.4 billion.
The biggest question is sustainability. At the end of the day, Rite Aid doesn’t consistently make money and it generates negative free cash flow. Its peers include CVS Health (NYSE:CVS) and Walgreens. Both names have reasonable valuations, are profitable and pay attractive dividends.
The Bottom Line on RAD Stock
It’s not as if Rite Aid doesn’t have competition, particularly amid the continuously changing retail environment. However, if management can continue to gain momentum in free cash flow and net income, the stock price can have more upside momentum.
Here’s the thing though. RAD stock is a great example of why it doesn’t pay to be stubborn. Stubborn longs who have held this name for years were scorched, while stubborn shorts who continued to sell or refused to cover this name when it was under $1 were burned on this latest rebound.
It’s why I considered it a no-touch for a long time, years, really. Now though, the technicals look better amid an improving fundamental situation. That said, Rite Aid is still very much a spec play.