Rite-Aid: What Is The Reversal Catalyst?

| About: Rite Aid (RAD)

Summary

Rite-Aid is stalling inside of a two-month trading range.

Bear inability to push through prior lows suggests a bottom is in place.

FTC decision and next earnings release could provide the reversal catalyst RAD needs to move higher.

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Share prices in Rite-Aid (RAD) continue to be stuck in the mud and this suggests most of the market is waiting for the next shoe to drop in what has been a long and complicated story for the company. As traders both long and short contemplate the next direction in RAD, we continue to watch for the next reversal catalysts that are on the horizon as any moves from here could conceivably match the proverbial "powder keg" event for the company's share prices. Most immediately, these will be seen in the next steps to be taken by the Federal Trade Commission (FTC) and in the company's next round of earnings numbers, which will be released on Sept. 28. If we do not see an approved deal with Walgreens Boots Alliance, Inc. (WBA), traders should expect some additional downside in RAD. Traders should also expect a greater level of importance paid to the next earnings release, as it will be a key indicator of Rite-Aid's future ability to attract another buyer for the company. In any case, we should see some volatility in the stock relatively soon, and since the upside is the current path of least resistance, we recommend against holding short positions with this side of the market already showing extended levels.

Rite-Aid Earnings History: NASDAQ

For the fiscal Quarter ending Aug 2017, Rite-Aid will release earnings before the open on Sept. 28th, with the results expected to come in at $-0.01 per-share. The company has managed to grow revenues in its brick-and-mortar businesses but this has failed to translate to Rite-Aid's bottom line, and many investors have grown skeptical of the possibility that any company is willing to buy further into RAD's asset base. Total debt figures are growing at a rate of 4% based on the numbers seen last quarter and this is only adding to the argument that the company is a sinking ship in its final stages. When we compare Rite-Aid's $7.24 billion debt to its $2.45 billion market cap, it is clear why the concerns have not abated. Moreover, the pharmacy business as a whole has faced headwinds since the election of Donald Trump, and this is another factor that has made Rite-Aid less attractive to buyouts from companies in other industries.

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Analyst Recommendations: Yahoo Finance

From the analyst perspective, we have seen some erratic activity but this is not altogether surprising given the nature of the Rite-Aid story. But what is important to remember here is the fact that the majority of the analyst community still rates the stock as a hold (despite all of the well-publicized issues with the stock) and this does bode well for those with long positions given the reduced chances we will see a real turn in sentiment with respect to the company.

On the other side of the equation, we have seen some small improvements in the viability of the market's short interest in RAD -- but not much. Currently, short interest represents 11.9% of the total float, which is still extreme and the small improvement indicates that the market might be coming to its senses in terms of the potential downside in prices for RAD. If this continues, bears are likely to start throwing in the towel at a greater rate and this could get the ball rolling for RAD in the normalization of the stock price relative to its historical averages and alignment with the value of its asset base.

RAD Chart Analysis: Dividend Investments.com

For traders that have been watching the stock on the longer-term time frames, it is important to note that RAD stock has fully completed a head-and-shoulders This is somewhat rare to see a full completion of this sort in the stock market and it does suggest that the bearish declines have reached a point of exhaustion. Pattern completion is further validated by the bullish readings in the Commodity Channel Index and the fact that support in the 2.20 area has remained intact despite several bearish attempts to push markets through these areas. All together, this does not erase all of the concerns that are currently in place for Rite-Aid as a company but the excessive short interest combined with the potential for bullish catalysts near-term does suggest that there is a growing possibility for an upside reversal over the next few weeks.

What is your position on Rite-Aid (NYSE:RAD)? We look forward to reading your comments. Stay tuned to Dividend Investors and receive our next alerts by clicking the "Follow" button at the top of the page. Happy trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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