Early this year, eager traders jumped on practically any stock with a Covid-19 connection. It seems that health and wellness services company XpresSpa (NASDAQ:XSPA) caught on to this trend and found a way to generate interest in XSPA stock.
What XpresSpa did was practically transform itself into a completely different company. All of a sudden, XpresSpa’s primary focus was providing Covid-19 screening at airports. XSPA bulls might argue that this was a smart move since people were clamoring for more testing.
There may be some merit to this argument. Judging by the recent increase in trading volume, it’s fair to say that XpresSpa did indeed generate more interest in its stock.
However, a closer look at XpresSpa will uncover some issues that should dissuade informed investors from considering a long position in XSPA.
A Closer Look at XSPA Stock
A particular event, which we will discuss momentarily, makes it somewhat difficult to analyze the historical price action in XSPA. Suffice it to say that the XSPA share price was substantially higher two years ago than it is today. It was also much higher three, five and ten years ago.
Since mid-June, XSPA has been on a steady decline. The bulls will want to see a strong push above $4 and, better yet, $5 in the near future. They should also hope to see a pickup in trading volume because they’ll want to see some conviction behind the price action.
It certainly wouldn’t hurt if XpresSpa were to do something constructive to generate more interest in the stock. Without any positive catalysts for the company, the XSPA bulls may struggle for a while.
XpresSpa Goes All In
The most important development for XpresSpa this year, by far, was when the company partnered with health and wellness marketing agency HyperPointe to provide screening and testing for Covid-19 in airports in the United States.
A pilot program was scheduled to start in June at John F. Kennedy International Airport’s Terminal 4. The Covid-19 testing was to be offered to airline employees, contractors, and a variety of other workers.
At that time, XpresSpa Group CEO Doug Satzman suggested that his company would be a key component of the global battle against Covid-19:
“We believe we have a significant role to play in the fight against COVID-19 given our airport relationships, infrastructure, workforce, and strong desire to keep travelers and the entire airport community safe.”
So, XpresSpa effectively went all in on the Covid-19 testing and screening angle. But is that, in itself, a sufficient reason to own stocks in XSPA now?
Seeing the Problems
Traders might be eager to jump on XSPA as a Covid-19 play, but we should want to see strong financials before taking a position in the stock. We certainly didn’t see that in the first quarter:
- Comparable store sales declined 26.5%
- Operating loss from continuing operations surged to $10.7 million
- Net loss rose to $10.7 million
- Total revenue was down to $7.7 million
Moreover, XpresSpa announced a one-for-three reverse stock split with a par value of $0.01 per share in June. It’s almost never a good sign when a company initiates a reverse stock split.
It could be a ploy to keep the share price high enough to avoid the perception that XSPA is a penny stock. Worse yet, reverse splits are sometimes a way to prevent a stock from eventually being delisted. This is because exchanges often have share-price minimums and reverse splits typically increase the share price.
Furthermore, it’s worrisome that XpresSpa recently agreed to sell (via short-term warrants) up to 7.6 million shares of XSPA. This could be problematic as the company appeared to be unloading millions of shares at a discount. In response to this announcement, the XSPA share price promptly declined.
The Bottom Line
Overeager traders need to see the problems with XSPA instead of just grabbing the shares and hoping for the best. It’s best to wait for clear evidence of strong financials before jumping headfirst into this Covid-19 investment.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.