A couple of weeks ago, I suggested Rite Aid Corporation (NYSE: RAD ) shares were hinting at a rebound rally that was, amazingly enough, worth a shot. The company had been beleaguered for months as the intended deal with Walgreens Boots Alliance Inc (NASDAQ: WBA ) unraveled far longer than expected to complete, and ended up being much smaller than planned. But, the bears overshot, and RAD stock had more than a little room to recover.
That optimism was called into question a week ago, after a disappointing earnings report sent RAD stock lower to the tune of 6%. The bulls ultimately held the line though, quickly quelling the selloff and keeping shares in the hunt for a breakout. Now the bulls are testing the waters of higher highs again.
And as before, the lines in the sand are conveniently clear.
Finding Floors, Testing Ceilings
I'll reiterate something I said in December: RAD stock is only a trade at this time, not an investment. There's been no measurable fundamental improvement yet, so this isn't a name to get married to by any means.
But what a trade this could end up becoming if you know when to get out.
It's all about the chart, so let's just start (and largely finish) there. Take a look. As wobbly as RAD has been over the course of the past week, it's still holding above key moving averages. Better still, the 20-day moving average line (blue) has now crossed above the 100-day line (gray), and both are still acting as a floor, keeping the stock in position for the next bullish leg.
Click to Enlarge
There's still a major technical hurdle around $2.23 (orange, dashed), which has been a ceiling of late and was a floor in the latter half of last year. Ideally, Rite Aid stock will clear that sooner or later. There's also the pivotal 200-day moving average line (green) at $2.67. If and when that potential ceiling is broken though, there's not a lot left in terms of things that could quell the rally.
Again, the rally will end sooner or later, but not before the bulls could score a pretty good lick once the ball gets rolling.
Other Help for RAD Stock
Curiously, the short-term bullish rhetoric isn't just mine. Almost as if scripted, the company unveiled plans to beef up its pharmacy benefits management business.
Rite Aid's pharmacy benefits management, or PBM, arm called EnvisionRx didn't get much attention last year mostly due to wrangling with the surprisingly difficult deal with Walgreens.
Specifically, it failed to win new Medicare part D business . That should change going forward though. As President Kermit Crawford put it earlier this month , EnvisionRx should be a "growth engine for the entire enterprise."
In the meantime, with the proceeds from the sale of stores to Walgreens slowly but surely whittling down its debt at the same time insurance reimbursement rates are finally stabilizing , current and would-be owners of Rite Aid stock are at least acknowledging the future isn't outright guaranteed to be dire.
There's even chatter that new Medicare business could make the remaining half of Rite Aid a buyout target . The key on this front is scale, and Rite Aid doesn't have the same amount of scale rivals like CVS Health Corp (NYSE: CVS ) enjoys with its PBM arm.
Though a CVS-Rite Aid tie-up wouldn't be any more palatable to antitrust watchdogs than the intended Walgreens-Rite Aid union was, teaming up with an insurer remains a possibility.
These glimmers of hope may have surfaced anyway, even if the stock hadn't started to edge a little higher. It's certainly easy for the media to pen such optimistic ideas, however, when the stock in question is rising rather than sinking.
More important, now that the glimmers of hope are shining again, more optimistic articles are likely to surface, fanning the young bullish flames.
Bottom Line for RAD Stock
Again, it can't be stressed enough that any bullish interest in RAD stock right now should be seen as nothing more than a speculative interest. This is an organization that has a retailing problem that's far bigger than its debt problem or a PBM business problem, and that problem's far from being solved.
Still, with the potential for as much as a triple-digit rally from current levels on the table, it may well be a risk worth taking… particularly if RAD stock can clear the hurdles discussed above. Just keep close tabs on any trade.
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.
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