Rite Aid Stock: Risk Lovers, Speculators Inquire Within

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In theory, investing in pharmacy operators should be less volatile than it is. In reality, the opposite is true. Last year, Walgreens (NASDAQ:WBA) was the worst-performing member of the Dow Jones Industrial Average and that ominous competition wasn’t all that close.

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To start 2020, CVS Health (NYSE:CVS) is lower by almost 10% and the drag on the stock is easy to identify: the Medicare For All debate just won’t die. In fact, it’s recently gotten stronger.

Then we’ve got Rite Aid (NYSE:RAD), by far the smallest and most speculative of the names mentioned here. As has been noted, Rite Aid recently engineered a price-inflating reverse split to stay within the New York Stock Exchange’s listing requirements.

And as I recently noted, those gambits rarely pay off. In most instances, companies that use reverse splits don’t save themselves, they simply give bearish traders a better place to short from. In very plain English, an investor should not find a reverse candidate to be desirable.

Indeed, Rite Aid stock is coming off an impressive December rally, one that cost short sellers $187 million. That’s nothing compared to the roughly $9 billion Tesla (NASDAQ:TSLA) has recently cost bearish traders. That’s not an apples-to-apples comparison, but look at it this way: few shorts have begged more mercy with Tesla, so they’re probably not going to relent with Rite Aid, a more vulnerable company.

Credit Check

There’s an old investment saying that goes something like (forgive my paraphrasing) “credit leads equity.” What that means is that a company’s corporate debt can be a tell about future price action in the stock.

Rite Aid recently exchanged $600 million in notes coming due in 2023 for notes maturing in 2025. While that move will help with interest expense, at least one ratings agency doesn’t see a reason to upgrade the company’s flimsy credit rating.

“The exchange transaction will improve Rite Aid’s debt maturity profile but operational challenges remain”, said Moody’s Vice President Mickey Chadha. “We do not expect much improvement in credit metrics and free cash flow in the next 12 months as the retail pharmacy space remains under pressure while the success of new management initiatives remains uncertain.”

Moody’s rates Rite Aid Caa1 with a “negative” outlook. Bonds with one of the Caa ratings are “judged to be of poor standing and are subject to very high credit risk,” according to the ratings firm.

Buyers of Rite Aid debt are compensated in the form of interest payments (assuming the company can meet those obligations), but investors in the common stock don’t get a dividend, meaning they’re entirely dependent on a debt-ridden company to deliver capital appreciation. And yes, Rite Aid has a debt problem. Chadha continued:

Moody’s expects Rite Aid’s lease adjusted debt/EBITDA to remain high at about 6.0x at the end of this fiscal year ending February 2020, despite recent debt repurchases and better than expected third quarter operating performance. Moody’s does not expect much improvement in leverage in next 12 months given the competitive pressures Rite Aid is facing. The rating also reflects the company’s modest free cash flow and weak interest coverage with EBIT/interest below 1.0 times in the next 12 months.

Bottom Line on RAD Stock

Here’s what an investor gets with Rite Aid stock right now: a company with significant debt with almost 28% percent of shares sold short trading at nearly $5 above the consensus price target and, quite likely, a case study in the lack of effectiveness of reverse splits.

And no, there’s isn’t a buyer lurking in the shadows to save Rite Aid. At the moment, there are better uses of an investor’s capital than pharmacy operators, Rite Aid included.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/rite-aid-is-appropriate-for-speculative-traders-not-long-term-investors/.

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