If I was a high-roller playing at Wynn Resorts, Limited (NASDAQ:WYNN) or MGM Resorts International (NYSE:MGM), I might consider the occasional, speculative bet. But if the gamble was for something more significant — say, a kid’s college education — I’d think twice. Hence, my hesitation to call Rite Aid Corporation (NYSE:RAD) anything but a long shot.
I certainly can understand the bullish appeal for RAD stock. As a technicality, Rite Aid can still be bought out by Walgreens Boots Alliance Inc (NASDAQ:WBA). InvestorPlace’s Vince Martin states “That deal would value RAD stock at $6.50 per share (at least), implying roughly 70% upside.” Unless you’re an investor in cryptocurrencies, such energetic bursts over a short period of time is unheard of.
Therefore, the contrarian trade makes a lot of sense, if you can stomach the risk.
If you’re especially feeling lucky, you could buy some out-of-money calls on Rite Aid stock. If WBA makes the move, you’re obviously looking at gains well beyond the implied 70% swing. Of course, if you’re wrong, such a “RAD” directional bet will likely leave you with nothing.
This is where the palms get a little sweaty. If you mitigate the risk on Rite Aid stock by betting small, your potential reward is clearly lessened. If you go too hot, you may have some explaining to do with a significant other.
To me, it all goes back to one question: how likely is this RAD stock buyout?
Plenty of Roadblocks for Rite Aid Deal
According to Mr. Martin, the odds are not favorable. He writes that “Rite Aid itself is coming off a weak FY2017, where same-store revenue declined and profits fell further. There’s a chance this could work out for RAD stock holders, but it’s not likely. And, even with Rite Aid stock falling in trading Tuesday, the stock looks like a gamble at best.”
I’m sure that Walgreens is second-guessing its strategy on RAD stock given the recent news. An even bigger problem is that the retail pharmacy industry is declining. Fred’s, Inc. (NASDAQ:FRED) is not performing to expectations, which is not helpful in convincing federal regulators that a Rite Aid buyout won’t negatively impact competitiveness.
Indeed, I find disappointing news in the pharmacy sector hardly surprising. When I last wrote about Rite Aid stock, I mentioned that drug stores as a whole were facing substantial headwinds. In particular, the retail prescription business are facing lean times since the election victory of President Donald Trump.