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A Risky Opportunity Gap Is Available for XpresSpa

Easily among the most perplexing though fundamentally relevant companies during this terrible novel coronavirus pandemic is XpresSpa Group (NASDAQ:XSPA). Before the crisis, the company specialized in health and wellness centers at major airports, providing rejuvenation for travelers. After the Covid-19 outbreak, management pivoted to airport testing, which on the surface makes brilliant sense. Unfortunately, that brilliance has not translated to a consistently positive XpresSpa stock price.

woman in a white shirt wearing a face mask while at an airport
Source: Maridav / Shutterstock

Don’t get me wrong – early speculators saw extreme profitability with this name. Back in the first half of May, shares were trading below $2. But toward the end of that month, XpresSpa stock was on the move. By early June, shares closed up above $7. But that was also the signal for the bears to come in and they did, “forcing” the price down to its current threshold, trading just under $2.

Basically, we’ve come full circle. Therefore, despite what should be a powerful pivot on paper, the lack of profitability translation to XpresSpa stock has even some of the ardent bulls worried. And believe me, those that support XSPA often support it with a passion. You have been warned!

Under the present situation, though, it’s easy to get down on the company. Certainly, XpresSpa stock was a speculative affair in the best of circumstances. But for those that still want to pull the lever on XSPA as a “dumb” money bet, is there hope?

Facts Regarding Covid-19 Testing Demand

To answer the above, there’s always hope (until there isn’t). However, XpresSpa stock offers some credibility for the optimists. But before I get into the possible bullish angle of XSPA, let’s discuss two incontrovertible facts.

According to the Federal Aviation Administration, the air travel industry represents a significant cog of the national GDP, providing both direct and indirect taxable revenue channels. Here’s an excerpt from “The Economic Impact of Civil Aviation on the U.S Economy”:

Civil air transportation plays a major and growing role in economies around the world. In the U.S., more than 5,000 public-use airports support over 18,000 air transport and 210,000 general aviation aircraft performing about 50 million airport operations. The number of passengers enplaned at U.S. airports is approaching 1 billion, about 100 million more than a decade ago. Since travel demand is derived from other pursuits, whether business or leisure, the extremely active aviation industry supports a range of economic impacts throughout the economy. As this report shows, all this activity, across both direct and catalytic sectors, amounts to more than 5 percent of our Gross Domestic Product, contributes $1.8 trillion in total economic activity and supports nearly 11 million jobs. Considering only the direct sectors, the impact is 2.3 percent of GDP, $850 billion in economic activity, and over 4 million jobs.

If we’re serious about sparking an economic recovery, whoever is our next president must restore confidence to the airline industry. More than likely, that confidence will not come about until we have robust testing measures at transportation hubs.

A Lingering Threat

Further, as long as the novel coronavirus is a lingering threat, the best defense against it is not social distancing nor wearing masks. Rather, it’s “abstinence” – in other words, the safest contact is no contact. But when no contact is impossible, the next best option is to ensure that crowded spaces are only occupied by healthy individuals; hence, the fundamental case for XpresSpa stock.

And these aren’t my words or opinions. Consider this statement from The Lancet, a peer-reviewed medical journal:

Compared with front-line health-care workers who reported adequate availability of PPE, those with inadequate PPE had an increase in risk. However, adequate availability of PPE did not seem to completely reduce risk among health-care workers caring for patients with COVID-19.

Please key in on the second sentence. Even with personal protective equipment (PPE), the risk of coronavirus transmission was not zero. Likely, one of the reasons why people are not taking advantage of the discounted airliner fares is due to the reasonable perception that being around sick people will probably make you sick as well.

It turns out, The Lancet study on frontline workers at least provides reasonable justification for this concern.

The Speculative Bullish Case for XpresSpa Stock

Though outside fundamentals logically support XpresSpa stock, as you’ve found out during this new normal, logic (or what you perceive to be logical) doesn’t always correlate with market trajectory. So, we need to analyze XSPA based on its own specific catalysts.

While there are many bullish factors supporting shares, I’m going to focus on the stock’s relationship with daily Covid-19 cases. Simply, because XpresSpa made a pivot to Covid-19 testing centers, you basically need a “robust” coronavirus environment.

On the surface, this makes sense. But this context also possibly demonstrates why XpresSpa stock has been weak of late. Please note that right before the massive surge of Covid-19 cases in the summer, XSPA got ahead of itself, jumping to $7-plus ahead of the wave. Then, as Covid cases hit a peak and started gradually declining, the bears hammered XSPA.

An Opportunity Gap

Interestingly, between the beginning of March through Oct. 22, XpresSpa stock and coronavirus cases share a 35% correlation. That demonstrates some positive correlation but the magnitude is not enough to warrant this relationship as statistically significant.

XSPA stock and a possible opportunity gap
Click to Enlarge
Source: Chart by Josh Enomoto

But as I mentioned above, extreme bullishness in XSPA got ahead of itself. By “correcting” for this lag or misalignment if you will, the correlation coefficient is much more significant at nearly 67%. This is really what the bulls are aiming for. If XSPA was rational, it would move higher as Covid-19 cases increase.

However, by performing this “alignment” exercise, we also see a fundamental “opportunity” gap with XpresSpa stock. Namely, as Covid-19 cases continue to worsen since early September, XSPA stock has plummeted, resulting in a negative correlation of 79%.

Of course, this misalignment is based on the context of my personal thought experiment. In reality, XSPA has been relatively flat while coronavirus cases are definitely soaring. Therefore, if you believe that coronavirus cases will worsen into the winter and throughout some portion of 2021, XpresSpa seems to make sense.

I mean, more cases should translate to more demand for testing centers, right?

Multiple Variables at Play

While the bullish case seems reasonable when you apply the economic facts and the logic-based argument above, there are unfortunately several other variables at play. Frankly, I don’t have the time to list every single headwind – we could be here for days.

However, one that sticks out to me (beyond Covid-19 cases magically disappearing) is the political environment. If President Donald Trump wins a second term, he and the Republicans are largely in favor of reopening the economy. In that case, we’re going to need to manage the threat instead of hiding from it. Theoretically, Trump’s second term should be positive for XpresSpa stock.

As you know, however, that second term is nowhere near guaranteed. If we assume for argument’s sake that the polls aren’t fake, then Joe Biden could take the White House. And that may mean more comprehensive measures to address the Covid-19 pandemic. In that case, airline demand may decline, naturally hurting XSPA.

Overall, you can go either way with XpresSpa. However, if forced to provide a directional answer at gunpoint (something that may not be beyond some of XpresSpa’s passionate fan base), I think it’s worth “dumb” money speculation. In my opinion, neither the Democrats nor the Republicans can afford to mess around with the economy. And that should lean, perhaps ever so slightly, to XpresSpa’s favor.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.

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