In the first half of July, I mentioned that ExpresSpa Group (NASDAQ:XSPA) deserves significant credit for not crying over spilled milk. Instead, management rolled up it sleeves and pivoted to a radically new business model: testing for the novel coronavirus. However, I was ultimately skeptical about XSPA stock over the long run due to the myriad variables associated with the Covid-19 pandemic.
In hindsight, I’m glad that I brought some skepticism to the table because XSPA stock became volatile shortly after my article was published. But with shares back to around where they were on July 9, the date of publication, I’ve taken the time to digest my analysis. Long story short, I think I was asking the wrong question (but fortunately ended up with the right results).
This time, I’d like to (hopefully) ask the right question and also get the right results. At this juncture, what prospective investors should ask themselves is, do enough people believe in this pivot? Currently, the answer is a resounding yes.
Over the last few weeks, several analysts have studied the fundamentals and have come to a less-than-favorable conclusion. But it’s the wrong framework. XSPA stock thrives on determined traders and big hopes, not the company’s actual business model.
New Normal Math Favors XSPA Stock
Under ordinary circumstances, the bears would likely have the better case regarding XSPA stock. But as we’ve all learned, these aren’t ordinary circumstances. Instead, we’re living in the new normal, one that has seen explosive growth in Robinhood and other popular investing platforms.
For whatever reason – likely due to the need for Covid-19 testing to move the air travel industry forward – the masses have chosen ExpresSpa as their go-to pick. Of course, mere bullishness is not enough. You also need to produce positive outcomes; otherwise, what’s the point?
Interestingly, several analysts have pointed to the Robinhood effect as the catalyst for exuberant, irrational trading among hot stocks. But what separates ExpresSpa is that the math supporting the bullish case is very compelling.
My theory is that the nature or personality of XSPA stock has fundamentally changed. To measure this, I took a five-day rolling correlation coefficient between two metrics: daily bullish trading sentiment and daily performance (outcome).
If this time is different for XSPA stock, I should see variance between the coefficient of trading in 2020 versus prior years. Not only do I see that in the data but the variance in my opinion is statistically significant.
Following ExpresSpa’s initial public offering and the exuberance of youth, XSPA began trading in a defined range between third-quarter 2013 and Q2 2018. But the average coefficient here was a measly 3.8%, with a peak coefficient no higher than 15.3%. In other words, there was no statistically significant relationship between bullish sentiment and positive outcomes for XSPA stock.
But you cannot say that this year, specifically in Q2. That’s when the coefficient hit 42.72%, up almost three standard deviations (from the total dataset). This is the kind of productive enthusiasm that you just can’t ignore.
How Long Can This Last?
Despite the wishes of ExpresSpa’s passionate supporters, no publicly traded asset goes up indefinitely. At some point, skepticism will weigh on the valuation. But when?
That’s the million-dollar question. Now, I respect the bulls’ arguments here, which are plentiful. As I stated earlier, we may need airport testing to get the economy (literally) moving again. Thus, with ExpresSpa’s first-mover advantage in attempting to monetize this space, this could provide a long-haul catalyst for XSPA stock.
However, you should also be careful about going too overboard. Mainly, Covid-19 testing adds one more massive inconvenience for travelers. Yes, Germany is rolling out airport testing successfully thus far. But travel demand is down virtually everywhere. So, while testing works now, will it work when we return to 100% capacity?
I should point out a wrinkle here that could give us clarity and that’s the political backdrop. Gradually, air travel demand is improving. But it’s still down about 70% from year-ago levels. To get into the meat of the recovery, the entire air travel supply chain – including possible testing mechanisms – will need additional federal support.
With President Trump behind in the polls, he may not be in a position to refuse. Therefore, I think realistically, XSPA stock has an upside pathway till the election.
Over the long run, I’m still hesitant. I’d have to reassess the situation at the time. One of the risk factors to ExpresSpa is that other businesses can get very creative. Take for example Zephyr Aerospace. This is a company that is proposing revolutionary lie-flat seating compartments for economy class while maintaining seat density for airliners.
In my opinion, this is a win-win as the seating compartment facilitates social distancing in the cheapo seats, thereby reducing the need for testing.
Breaking It All Down
In the near term, XSPA stock is a buy. It’s not just about raving support on social media. That’s mostly noise you can ignore. Rather, this is support that’s producing positive outcomes in at least a modestly predictable manner.
Certainly, you do not want to short shares. Over the long term, I remain skeptical. If Covid-19 fades away, you’d think that ExpresSpa will have to pivot back to its original business, which wasn’t all that successful. Until then, happy trading!
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is considering XSPA stock as a short-term upside gamble.