How to Play WBA, FRED, RAD Stock On Walgreens Rite Aid Merger Reality

- December 20, 2016

rad-stock-merger-profitWalgreens Boots Alliance (NASDAQ:WBA) is divesting far more than the 700 Rite Aid Corporation (NYSE:RAD) stores needed to gain regulatory approval for the Walgreens Rite Aid merger to complete. Fred’s, Inc (NASDAQ:FRED) is buying 865 stores. This instantly makes Fred’s a retail pharmacy competitor and gives Walgreens all it needs to move forward. FRED stock jumped a whopping 90% on the news; RAD stock is up 5% and fast-approaching Walgreens buyout price of $9/share.

This truly is a win win for all.

As an investor who has owned RAD stock since it traded at $1.30, but also believes that markets are poised for a large correction in the coming months, I see a great investment opportunity that came from this deal.

Just one day after I disclosed a big cash investment plan to start 2017, the Walgreens Rite Aid merger’s likelihood of approval went to 99.9%. Therefore, with RAD stock trading at $8.60/share, and the deal expected to close sometime in the first quarter of 2017, it really is the perfect replacement for cash in a portfolio.

That said, BNL Finance has been beating the drum on Rite Aid stock for months, actually years. The point is that RAD stock has always traded in a way that reflected uncertainty, regulatory hurdles, and skepticism that the Walgreens Rite Aid merger would become a reality. We declared victory a long time ago, but the rest of the market has finally caught up.

As a result, Rite Aid stock is perfect for investors who want to hold a lot of cash into 2017. That’s what we are doing, planning to be opportunistic and hoping to buy stocks at cheaper prices. However, even if stocks continue to rise and the Dow Jones passes 20,000 with ease, my guess is that no industry or index will return gains of 4.5% faster than RAD stock. With it trading at $8.60 right now, that’s exactly how much upside is remaining to satisfy Walgreens’s purchase price.

RAD stock is good, but what about WBA and FRED stock?

kroger-walgreens-rite-aid-mergerAll things considered, RAD stock is solely a short-term merger arbitrage play. It is for investors who don’t expect 4.5% market gains over the next 3-5 months, and who seek a better alternative to cash. In my opinion, the only way that Rite Aid stock becomes a “Sell” is if it comes within a percent of $9/share near-term. If so, it’s time to take profits.

When that day comes, the best place to put RAD profits is in Walgreens.

Fact is that the Walgreens Rite Aid merger will create an absolute powerhouse in the retail pharmacy space. In turn, Walgreens will be able to grow its wholesale and pharmacy benefit management businesses even faster, with more leverage over drug companies. We explained why WBA becomes such a good investment post Rite Aid buyout here.

With that said, FRED stock may be 85% higher on the news of this deal, but investors should tread carefully.

Yes, Fred’s more than doubled its retail footprint, but keep in mind that Walgreens only sold 5% of its collective stores. Fred’s is still nowhere near the scale of Walgreens or CVS, and let’s not kid ourselves into thinking that Walgreens sold the best Rite Aid stores in the best locations to Fred’s.

Even with today’s gains in FRED stock, the company has a market capitalization well under the $950 million it is paying for Rite Aid stores. While Fred’s does have a strong balance sheet, the acquisition will be difficult, and will prevent Fred’s from making the kind of strategic changes needed to improve its supply chain and rebrand stores.

In other words, FRED stock may go higher short-term, but my best guess is that investors who trust its management and see real opportunity in Fred’s will have better entry points later on.

Meanwhile, our bottom line is unchanged: Buy RAD stock as the perfect low-risk merger arbitrage opportunity as an alternative to cash and a better return that stocks. Then, use those profits to up your total return with WBA.

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