In theory, a global pandemic should be just the elixir for upside for drug store operators and pharmacy benefits managers (PBMs), of which Rite Aid (NYSE:RAD) is one, yet here RAD stock is lower by 37% this year.
Underscoring how weak the PBM group is, Rite Aid isn’t even the worst performer. That dubious distinction belongs to Walgreens (NASDAQ:WBA). CVS Health (NYSE:CVS) is the “star” of the trio with a 2020 loss of around 20%.
Indeed, part of the problems faced by the group are attributable to election year jitters. Historically, healthcare stocks of all stripes scuffle in presidential election years. However, the sectors, such as biotechnology and medical device names, usually rebound soon after the election – regardless of the result and continue doing so for another 12 months.
Rite Aid and friends could easily be exceptions to that trend. Price action in PBM equities this year is, arguably, pricing in not only a victory by former Vice President Joe Biden, but the Democrats controlling both houses of Congress come January 2021. That would make it easy for the party to attack the issue of high drug prices, making RAD stock and rivals vulnerable in the process.
RAD Stock is Politically Sensitive
Drug prices are, mostly, a bipartisan issue and the Trump Administration has tried to deal with the matter in its own right. Last year, Rite Aid and its rivals rallied after Trump abandoned a plan to overhaul the rebates companies like Rite Aid receive from pharmaceuticals makers.
Alright, so that removed one overhang for Rite Aid, but there’s more. Right after Election Day, the Supreme Court will hear another challenge to the Affordable Care Act, also known as Obamacare. This case centers around the single payer mandate. Let’s assume for a moment that Amy Coney Barrett is confirmed to fill the open seat on the high court. That pushes the court further to the right, regardless of whom is president.
That could open the door to Obamacare being weakened – it’s unlikely to be struck down entirely – and that could weigh on Rite Aid because it lacks some of the levers of a CVS, which can offer primary care for the uninsured.
Not only is Rite Aid fundamentally flawed and politically sensitive, it’s financially flimsy. It generates no cash flow and has a credit rating of Caa1 from Moody’s Investors Service. That’s not just bad. It implies elevated risk of default.
Investors ought to consider that credit grade before jumping into RAD stock because the company has $3.3 billion in long-term liabilities against a market capitalization of just $549.14 million.
Should Rite Aid need more cash, and it very well might, it’s best avenue is likely selling equity, further diluting shareholders. The last time it hit credit markets was earlier this year when it pushed out $750 million in debt coming due in 2023 to 2026 in exchange for a higher interest rate. That’s not something companies with strong balance sheets do.
Recipe for Trouble
If I had to bet, I’d wager the Supreme Court doesn’t materially weaken Obamacare. However, that doesn’t eliminate the drug price risk from the Rite Aid equation.
That will only increase if Biden wins and his party controls both houses of Congresses. In fact, it’d likely be an issue that comes up right away with the Democrats using it as a centerpiece in the 2022 mid-term elections.
Even if none of the above come to fruition, Rite Aid is still risky because of its precarious financial position, which was accrued without the aforementioned issues coming to life. Put simply, investors looking for healthcare ideas today can and should do better than bottom fishing with Rite Aid.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.