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How's That Reverse Split Working Out for You, Rite Aid?

By Rick Munarriz - May 1, 2019 at 1:08PM

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The drugstore operator's 1-for-20 reverse split means that the stock is in compliance, but investors continue to bail on the poorly performing investment.

Rite Aid (RAD 1.63%) is no longer a penny stock, but this doesn't mean that investors are finally off the road to perdition. Rite Aid completed a 1-for-20 reverse stock split last week. Swapping out every 20 shares for a single new share may be enough to artificially lift the price into exchange-listing compliance, but even speculators know that reverse splits are best avoided in the near term. Rite Aid stock has fallen nearly 15% in the past six trading days following its April 22 split. 

A stock tumbling after a reverse split is an easy high-percentage call. It's not a surprise that Guggenheim analyst Glen Santangelo assumed coverage of Rite Aid -- downgrading the stock from neutral to sell -- just two trading days before the split. He argued that Rite Aid's chunky debt will get in the way of a turnaround as it battles through structural and competitive issues. Any bearish argument could've done the trick. When a company executes a reverse split, the right call more often than not is to run the other way.

Rite Aid promo for pharmacy champions featuring a smiling female pharmacist.

Image source: Rite Aid.

Splitting headache

There's plenty of blame to go around in sizing up the two missed freeway exits that are now fading the in rearview mirror on this brutal road trip. It's easy to fault antitrust regulators with getting in the way of the initial buyout proposed by Walgreens, but then the blame falls squarely on its shareholders when supermarket behemoth Albertsons proposed a combination that ultimately fell apart last summer. 

Several vocal institutional and individual investors argued that Rite Aid shareholders should not approve the second proposed merger, feeling that Rite Aid deserved more of the combined company. Sensing the writing on the wall, Rite Aid pulled out of the deal days before the voting deadline. Investors talking down the Albertsons deal were wrong, and the shares have surrendered roughly three-quarters of their value. Albertsons remains privately held, but it's fair to say that its value has crated in the same manner. 

A reverse split seemed inevitable the moment that Rite Aid shares buckled below the $1 mark in December. After being jilted at the altar twice, it's not as if a third company was going to step up with a third buyout proposal, and on its own, Rite Aid is struggling. 

Revenue fell short of Wall Street's watered-down expectations in Rite Aid's latest quarter. Though there are things far worse than flattish growth from continuing operations and a fiscal 2020 outlook for stable comps, it's hard to get excited about Rite Aid's future.  

The pharmacy chain's stock price may match where it was four summers ago -- just before Walgreens stepped in with the first of two painful buyout attempts -- but when we adjust for the 1-for-20 reverse split, we see that investors have seen their stakes plummet by roughly 95% in that time. It's up to Rite Aid to turn itself around on its own now. The payout will be substantial if it's able to pull off the recovery, but in the near term, it's going to have to deal with penny stock gamblers bailing out of the post-split stock.  

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