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A RONA outlet. The Quebec-based chain is the target of a takeover bid by U.S. based Lowe’s. (Fred Lum/Fred Lum/The Globe and Mail)
A RONA outlet. The Quebec-based chain is the target of a takeover bid by U.S. based Lowe’s. (Fred Lum/Fred Lum/The Globe and Mail)

Schizas' Mailbag

Rona is a case of 'investor know thyself' Add to ...


I wonder if I should wait or sell Rona now?

Would appreciate a second opinion.

Regards, Rena

Hey Rena,

Thanks for the assignment. Rona Inc. has been the subject of takeover rumours that started circulating in April of 2011 when Irwin Michael, portfolio manager at ABC Funds suggested that the majors could be interested in the company. A year later the stock moved off the low of $9.00. In a special report published in The Globe and Mail on April 11, 2012, David cited comments from the CFO of Lowe’s Cos. who said, “Rona is a very interesting company” which signalled that the game had gotten more serious. By late July an offer from Lowe’s surfaced.

The biggest concerns that I have with what is happening with the shares of RON is that all the upside has come because of the deal not from ongoing organic growth. The company has suffered from a long slide in net income which no doubt attracted the attention of Lowe’s which has been bleeding cash since arriving in Canada. It may be the case that the $14.50 per share offer was too low and that it will have to be sweetened for the deal to close.

A review of the charts will provide further insight into how best to proceed with your investment.

The three-year chart outlines the long decline in the value of the stock as the company struggled to meet the challenges posed by its competitors, the weather, and the effects of the slow growth economy that has cast a pall over the economy since 2008. Consumers tend to sit on their wallets when they are uncertain as to their prospects for continued employment and the value of their investments. The gap up in early April of 2012 was ignited when Mike S. Newton, Associate Director and Portfolio Manager at Macquarie Private Wealth mentioned Lowes by name as a potential acquirer. The gap up in late July followed the formal announcement of the offer.

At this point it looks like the market isn’t so sure that a new offer with a kicker will surface given the added uncertainty of interference by the powers that be in Quebec. In addition, Lowe’s management has been criticized for making the offer which has added another layer of uncertainty to the equation. The stock is trading below the $14.50 offer price which isn’t the strongest signal to investors that a competing bid from a white knight is anticipated.

What is also observable is that the MACD and RSI are not generating a strong buy signal at this point but they did indicate that it would be prudent to sell at $14.00.

The six-month chart provides some interesting patterns worth your attention. The first is the support that RON has found at $12.50 and against the 50 day moving average. The MACD generated a buy signal ahead of the late July gap up when the shares were trading for $11.00 and then signalled a sell in mid August at $14.00. The RSI confirmed both moves.

In addition there seems to a large pennant forming which would suggest a move higher. Finally the the MACD and RSI both seem to be turning up. The best way to proceed with RON is to make the decision based on your personal investor profile. If you are a conservative investor you will be taking a profit when available. Additional profits foregone are soon forgotten while losses are always recalled. If you have a bigger appetite for risk there seems to be some evidence to support holding out for more.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it to lschizas@globeandmail.com .

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