Jim Cramer, CNBC juggernaut and unofficial contributor of Wall Street humor (intentionally or otherwise), boldly stuck his neck out for the recently embattled Spirit Airlines Incorporated (NASDAQ:SAVE).
Growing increasingly uncomfortable with potential pricing wars over competitive commercial flight routes, Stifel analyst Joseph DeNardi downgraded Spirit, from a “buy” rating to “hold.”
Despite the negative implications this presents for the discount airliner, Cramer played the role of the contrarian, urging his Mad Money audience to keep the faith. Central to Spirit’s bullish argument is the massive decline in oil prices and an increased appetite within the domestic market for air travel.
But will such sentiment be enough to keep SAVE stock flying high?
Why Spirit Airlines? Boring Ol’ Statistical Analysis, That’s Why.
One of the most overlooked investment strategies is quantifiable risk analysis. Stated simply: What are the probabilities of making or losing money based on particular conditions? Traditional technical analysis methodologies, such as the identification of recurring chart patterns, can be subject to arbitrary interpretation.
However, with statistical analysis, we can quantify the likelihood of profitability based on historical data and price trajectories.
Perhaps the most common question from the investment community centers on timing: When is a good time to buy or sell a stock?
Logically, it makes sense to control for return on investment as a dependent variable of a stock’s rate of change. Performing this exercise for Spirit, using weekly price data from May 26, 2011, to March 9, 2015, yields the following result:
On paper, the airliner appears to be a long trader’s best friend. Whether SAVE stock was positive or negative against the prior week (the horizontal axis), its 10-week average returns mostly rendered positive gains. Bolstering Cramer’s case is that the further negative the week-over-week performance, the more likely it would produce profitable results over the next 10 weeks.
But before bidding bon voyage and embarking on the Spirit opportunity, we must recognize that statistical analysis has its own shortcomings; namely, that it is dependent on historical data and does not concretely impugn upon future trajectory. To capture a broader understanding, other factors should be analyzed to account for differing circumstances.
Instead of controlling for weekly rate of change, we will analyze 10-week average returns against price point.
The critical issue currently plaguing Spirit Airlines is that as valuations increase, the magnitude of profitability decreases consistently and dramatically. Within the context of a price of $73.19 (the time as of this writing), the historical probability of gaining profits at this price range is rather bleak.
Notice too that a healthy mix of bullish and bearish trading activity was most prevalent when shares were between $10 and $20. Beyond this range, trading activity became both sporadic and more levered on the bullish side, culminating with anomalous percentage swings north as the stock price pushed past $50.
That previously exuberant momentum has clearly died down. And the equity accumulation has not been enough to influence per-share valuations to a more convincing trajectory.
Bottom Line
Spirit’s stock has been on a short-term ascent since it was downgraded by Stifel. However, its share price has gained less than 6% since this year’s January opener — a fairly dramatic slowdown against its usual rip-roaring performance. This may mean a correction is overdue.
Since stocks typically move from periods of bullish or bearish sentiment, excessive time spent in one end of the spectrum is concerning. For Spirit Airlines, its continued success depends on consumer trends and favorable crude oil prices, circumstances that could change on a dime. Also, the extremely competitive nature of the airline industry could scare off many investors, which may lead to lower valuations.
Interested buyers might want to wait on the sidelines until the situation clarifies itself, although more adventurous traders might consider shorting SAVE stock to take advantage of weakened sentiment for the airliner.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
