Here’s Where to Ring the Register on Rite Aid (NYSE: RAD) Stock

Drugstore operator Rite Aid Corporation NYSE: RAD stock was highlighted in a MarketBeat Original article “Rite Aid Stock is a Value Buy at These Levels” on Nov. 23, 2020. Since then, shares have grinded as high at $20.22, up nearly 90% in 10-days after being crushed on the Amazon Pharmacy NASDAQ: AMZN rollout news. While a snap back reversion was expected, shares are gone up too far and too fast driven by a short squeeze heading into Q3 2021 earnings. While shares are still trading below pre-COVID February highs, a sell-the-news reaction may be in the cards after the steep run up. Prudent investors may consider trimming down exposure at opportunistic exit levels while maintaining a profit stop.

What Caused the Run Up?

The biggest question on investor’s minds is why RAD shares ran up so fast, especially in light of no significant news. A nominal reversion bounce after the effects of the Amazon Pharmacy news would have seen shares recover to the $12.50 to $13.25 pre-Amazon range. The $14 and $20 call strikes saw very heavy volume preceding the breakout, so there is much speculation floating around. The potential for a return to merger talks with former partner Walgreens Boots Alliance NYSE: WBA was squashed. What makes things very stark is RAD shares have largely faded the sell-offs in both CVS Health NYSE: CVS and WBA. Bullish speculation about the upcoming Q3 2020 earnings release could be powering the buying to perpetuate a short squeeze, but these type of run ups tend to form a sell-the-news reaction once the earnings are actually released regardless of the results.

COVID-19 Distributor

Both CVS and WBA have confirmed they are engaged with the national COVID-19 vaccine distribution plans. While RAD has provided COVID-19 testing, it hasn’t confirmed whether it will be involved with the distribution rollout. The Company is in the quiet period ahead of earnings so more information could arise in the conference call, however, it’s not a very large catalyst to justify the move. Despite the elevated revenues stemming from COVID-19 testing, a return to normalcy will inevitable dilute future revenues. It’s always important to gauge how the peers are performing on similar news and shares are stabilized at best, not advanced as a result of the rollout plans.

The Lurking Danger to PBM Margins

The larger danger that looms is the attack on pharmacy benefits manager (PBM) margins heading into 2021. The bipartisan effort to lower drug costs and provide more pricing transparency is a direct assault on PBM margins. The drug pricing battle has turned its attention from the drug makers to the PBMs. PBMs are the middle men that collect the discounts from the drug makers and determine pricing for medications to customers and insurers. This lack of consistency nor clarity has given rise to companies that use the power of scale to drive discounts for its network of users like GoodRx NASDAQ: GDRX which has a four million member network. Prudent investors who took a position in RAD under $12.50 may want to consider using opportunistic exit levels to lock in gains ahead an inevitable reversion.

 RAD Opportunistic Exit Levels

Using the rifle charts on the daily time frame is preferred due to the rapid move up to gain a precision near-term view of the playing field. The daily rifle chart formed a market structure high (MSH) sell trigger under $18.54. Shares initially slipped fast to $17.72 before coiling back up above the daily 5-period moving average (MA) at $18.35 just below the daily MSH trigger. The daily stochastic has peaked crossing down off the 100-band but is still floating above the 80-band. If shares fall back under the 5-period MA as stochastic falls under the 80-band, then a channel tightening towards the daily 15-period MA  at $14.74 is possible. It’s always preferable to unwind profitable positions from a position of strength. Prudent investors can use opportunistic exit price levels up to $22.49 to $17.52 to ring the register with a trail stop at the $16.80 Fibonacci (fib) level. Longer-term investors seeking to hold shares through earnings release can also sell covered calls at elevated premiums to buffer potential downside.