Has Rite Aid Stock Finally Bottomed Out?

There's an old adage among investors: Don't try to catch a falling knife.

Rite Aid (NYSE: RAD) stock has been a textbook example of a falling knife. Shares of the embattled pharmacy chain have plunged more than 70% so far in 2017. The decision by Walgreens Boots Alliance (NASDAQ: WBA) to throw in the towel on its plans to acquire Rite Aid has left once-optimistic shareholders reeling.

But while attempting to catch a falling knife isn't a smart idea, picking one up off the ground could be. Some investors have determined that Rite Aid stock is now a bargain buy. The big question remains, though: Has Rite Aid stock finally bottomed out?

Wall Street views

You might be skeptical about anything Wall Street analysts have to say about Rite Aid. After all, more analysts recommended buying or holding Rite Aid stock than selling it in the months leading up to Walgreens scrapping its proposed acquisition.

However, it's worth at least considering what Wall Street thinks about Rite Aid now. Analysts spend a lot of time crunching numbers and building models to help them estimate what a stock could be worth. And right now, the consensus is that Rite Aid's share price could rise more than 11% over the next 12 months.

There's another interesting thing about analysts' outlook for Rite Aid. The most pessimistic one-year price target for the stock is roughly 11% below the current level, but the most optimistic target calls for Rite Aid to gain over 30% within the next 12 months.

Could the projections of many of these analysts be way off target? Absolutely. But if you're looking for reasons to think that Rite Aid stock might be bottoming out, Wall Street appears to be providing some.

Actions speak louder than words

I think there is a stronger reason to think Rite Aid stock has either hit bottom or is really close to doing so than Wall Street opinions, though. Just look at what investors have actually been doing with respect to Rite Aid stock recently.

You won't find too many stock charts uglier than Rite Aid's. However, notice what's happened over the last month or so. The steep declines from earlier this year appear to have stabilized. It seems that investors generally think that Rite Aid stock is at least worth somewhere in the ballpark of where it's currently trading.

I realize that making a statement like that might almost sound like I'm endorsing technical analysis -- investing on a stock's price movement and volume. That's not the case at all. (If you want to know what The Motley Fool thinks about technical analysis, read the classic article on the topic: Technical Analysis Is Stupid.) I'm not advocating that you buy Rite Aid stock based on the stock chart. However, it does seem like investors are voting with real money in favor of Rite Aid being near its bottom after the huge sell-off.

A valuation argument

Perhaps the best reason of all to suspect that Rite Aid stock has bottomed out (or is close to doing so) consists of two parts: (1) The company is worth more than its current valuation, and (2) Plenty of investors realize that's the case. Let's look at each of the components to this argument.

Is Rite Aid worth more than its current valuation? I think so.

In July, I wrote that Rite Aid's market cap implied that each of its remaining stores after Walgreens buys nearly 2,200 of them (assuming the deal goes through) is worth a little over $1 million each. Rite Aid's market cap at the time of that writing was a little higher than it is now, but the idea and numbers are still applicable. However, Walgreens is paying nearly $2.4 million per store.

If Walgreens is willing to pay that amount per store, my premise was and is that someone would be willing to pay a lot more than $1 million per store. If that's the case, Rite Aid is actually worth more than its current market cap.

Does it make sense to think that plenty of investors realize that's the case? Wall Street's price targets and the recent performance of Rite Aid stock seem to indicate the answer is yes.

Bottom line

Really though, there's no way to know for sure that Rite Aid stock has bottomed out. Wall Street analysts could be wrong. They've certainly been wrong before. Investors could decide to run from the stock more than they already have, sending it to even lower lows. Walgreens' proposal to buy a big chunk of Rite Aid's stores could fall through. Even if the deal is finalized, any potential acquisition of more stores by other parties could be a long way off -- or possible never occur.

The bottom line comes down to this: You can't accurately time when to buy Rite Aid stock. If you believe (as I do) that the company really is worth somewhat more than its current market cap, buying Rite Aid could make sense. And that's true regardless of whether the knife is still falling or is already on the ground.

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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.