Rona Inc. presenting a negative technical picture

Apr 22nd, 2013 – Comment

The question at this point is if support at $10.25 will hold.


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Hi Lou,

What are your thoughts on Rona? I bought some last summer and it’s now back at the same price that I bought it at. Do you think that it’ll go back up or should I sell before it goes down any further?

Jenn

 

Hey Jenn,

Thanks for the assignment. I last reviewed the case for RONA Inc. (RON TSX) On September 10, 2012 when the shares were trading for $12.62. Rena wanted to know if she should hold for the $14.50 offer from Lowe’s Companies Inc. (LOW NYSE) or sell. The research conducted on her behalf suggested that a stock trading below an offer price wasn’t getting an endorsement from investors that a sweeter offer was forthcoming. Also noted was the concern that the appreciation of the stock price was driven by the offer rather than organic growth from the company’s core business.

It was advised that the hold or sell decision would be determined by her investor profile. A more conservative investor would take profits when offered and an investor with a larger appetite for risk would hang in for a higher potential reward. As things developed the The Lowe’s offer was pulled and the hope that a sweetened offer would emerge crashed and burned. There have been changes in the executive suite at the company, closing of some stores, a move to a smaller store format, as well as a recent downgrade on its debt to junk status.

All that activity makes another run at the charts a good investment.

 

 

 

 

 

The three-year chart offers a couple of features worth noting. The retest of support at the rock bottom near $9.00 after the deal with Lowe’s was scuttled gave rise to a new advance to resistance at $12.25 by February of 2013. Worth mentioning are the sell signals generated by the MACD and RSI at $12.25.

 

 

 

 

 

The six-month chart paints a picture of a downtrend that has provided resistance to any advance since the February highs. In addition take notice of the death cross that surface in April. The question at this point is if support at $10.25 will hold. Neither the MACD nor the RSI are indicating a move higher at this point. RON will report Q1 2013 in early May and is expected to report a loss on restructuring charges.

Given the intense competition in the home improvement space, a negative technical picture, and the tendency of Quebec based corporations to attract undue attention from government and its supplicants I would be looking for new fields to plough.

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