A double from a crisis trade

It is really an unbelievable journey for this crisis speculation I made early this year. If you have followed my blog, you should know that I did a quite "risky" (at least seemingly) speculation for a turnaround for the deeply troubled stock, Rite Aid (RAD) (see here). Back then, nearly everyone was betting for its bankruptcy but I saw its underlying value. So I did a crisis speculation with its call options. Glad I did so! While most of the time my calls were deeply in the water, all of a sudden, Bomb! It's exploding.... and to the upside. Within a month, RAD is shooting up 120% as its recent earnings were 18 times better than expected (and 90+% up just this week)!! You probably can never guess what has made so much contribution to its great earnings for the quarter: ice scream!!! My wife said their ice cream may be containing cannabis that hooks people into "addiction" 💤👀
Sounds crazy how could all the Street experts so much having mispriced this company, right? So don't listen to the so-called WS analysts but to me . See the RAD one month chart below:

While my timing was not great as I was way too early but I'm still glad to have mad the bold bet with a double by now. Since my calls will expire in Jan, I won't risk anything but took my profit and watch now. I think RAD will still have a great potential after it is cooling off a bit.

Today, I have another idea similar to RAD's crisis. It is about the U.S. Steel (X), which is currently priced for bankruptcy.  Last Friday, the company surprised the Street by updating its fourth-quarter guidance with a significantly bigger projected loss than Wall Street had previously expected. It really sucked and spooked investors! No surprise for the reaction: X fell more than 10% on the day. But the company is currently trading at just 0.3 times price-to-book ("P/B"). At those valuations the company's assets alone  (the book value) should offer a floor to valuations. And even X can not earn as much as expected, the company has no real risk of bankruptcy in the near term, with no debt maturities and significant flexibility around their obligations. So here is the point good investors ought to learn: when a company starts to trade at a significant discount to its assets this tends to serve as a "floor" for valuations. That's kind of crisis speculation all about: something priced in for a bankruptcy but the actual chance is low and even so, its underlying assets can easily cover its liabilities. This kind of hidden value requires some gut to explore but you don't need to bet the farm for a good profit. Of course buying its stock directly is an easy way to do the crisis speculation, although the risk is quite high for sure. But I have an idea that can bet for it for long term with no cost upfront. That's what I'm sharing with my Family for X and more.  

If you are interested, send email to dwmt19@gmail.com

You need gut!

I’m quite busy at the moment so I will be brief. Probably you can just ignore what I’m going to say below as most of you won’t dare to touch this one at all anyway. After all, this is not something I will talk to my wife. But for a few risk takers with a strong heart, this may be an interesting idea. It is truly a crisis investing speculation!

I’m talking about the troubled pharmacy chain retailer, Rite Aid (RAD). As I have alluded to, this is one of the most poorly managed companies publically traded and it deserves to be punished for the past two decades! Even at a price down to $0.55 per share, yes below $1, it dropped another 10% after its poor earnings and guidance reported yesterday. There is a true risk of bankruptcy for RAD, to be honest with you. But here is the thing, great money is often made from those with the extreme risk that turn the tidal wave around to become a little bit better. I see RAD has this kind of potential. For two reasons:

• RAD controls more than 2500 stores nationwide, which is a great asset for it. This could potentially be something attracting those with a deep pocket who are looking for such retailer stores.
• Although heavily debted with a huge negative cash flow, it is still generating $22 billion revenue annually.  The biggest problem for RAD has been its poor management but this may be changing. As reported, Rite Aid has eradicated its top executives and 400 managers in a recent shakeup. Whether or not it will help to turn it around is a big question mark but I think there is a good chance we may start to see some drastic changes benefiting the company. If so, this company in the deep crisis may see a light at the end of the tunnel, which could drive some real money to pour in. The stock has a 15% of short interest, which could easily trigger a gigantic short squeeze if even tiny bit good news started to flow in.

But again, this is a real risky speculation with a real chance of losing all the money put into this stock. Don’t touch it if you cannot sleep for the money held with it as you may never see your money again! Hope I have given you enough warning!!

Will Amazon strike again?

It has become a norm these days that whenever Amazon touches something, the companies for the thing will falter. We have seen this again and again, mostly in retail business, especially those relying brick & mortar stores. It is truly disruptive! You may have also noticed that in the past week or so, pharmacy stocks have been hit hard. Yes, again, it is related to the rumor that Amazon may decide to get into the online pharmacy business in the next few weeks. You can imagine how retail pharmacy investors are worried about their companies’ future. They run first.

 

If indeed Amazon wants to get into the pharmacy business, how will it do it? Sure, Amazon may just want to set it up from scratch by doing everything by itself. But pharmacy business is a highly regulated one and it could be a huge challenge for Amazon to jump into it directly. After seeing what it has done with Whole Foods for the grocery business, I’m thinking loud that there is a reasonable chance that Amazon may also want to jump start by buying a retail pharmacy company. This will allow Amazon to take off the regulatory risk immediately and deep dive into the business much smoothly. If my speculation comes true, which one may be the target of Amazon? There are 3 major retail pharmacy companies coming into my mind immediately. The two pharmacy giants, CVS and Walgreen, are the most popular ones and they are available almost every corner of streets across the country. Both of them are very well run and very profitable but they are not cheap at all. I think it is less likely Amazon will take either of them but if you ask me which one is more likely between the two, I’d say Walgreens. While both companies are very comparable in almost all the parameters, Walgreens has much less debt on its book than CVS, roughly one time less. But anyway, I don’t think it is likely for either of them.

 

I think the more likely target for Amazon is probably Rite Aid (RAD). Well, you may even have not heard of it or rarely seen it on the street. Indeed, it is a poorly run much smaller retail pharmacy and actually on the verge of bankruptcy to some extent. It is heavily in debt. So why am I thinking this is more possible a target for Amazon to take? Well, it all comes down to the reason why Amazon wants to buy a retail pharmacy in the first place. I don’t think Amazon is too much cared about the popularity and profitability of the pharmacy as it will make it popular and profitable. Due to the nature of the online business, it also does not need to have too many retail stores as it could be a huge management burden for Amazon. All it needs is to bypass the regulation hurdles as quickly as possible.  And for that purpose, a small and much cheap Rite Aid may service Amazon much better. Of course this is purely a speculation from my wild imagination and you don’t need to take it seriously. But also don’t be surprised if you suddenly hear the announcement that Amazon is taking over Rite Aid!