By-and-large, meme stocks have moved lower last month. But Exela Technologies (NASDAQ:XELA) stock was one that bucked the trend.
Shares in the business process automation provider are no stranger to rallies fueled by Reddit’s r/WallStreetBets community. Before its short-lived July run-up, it experienced a similar brief period of off-the-charts enthusiasm back in mid-March.
Recently trading around $3 per share, down from the $4-plus per share it was trading for only a few weeks back, should you buy it ahead of the next wave? Not so fast. Sure, it’s performance last month, compared to other heavily-shorted meme stocks like Clover Health (NASDAQ:CLOV), which sold off during the same timeframe, may make it seem like it’s the short-squeeze play that’s yet to become played out.
The time frame is different, but the story’s still the same. That is, Exela’s meme-squeeze moment has come and gone as well.
With the dim chances of more retail traders piling into it, don’t expect a repeat of its epic run. Instead, as it gets re-valued on its fundamentals? A move back to prior price levels (below $1.50 per share) seems more likely.
Comparing its chance of repeating its July performance against the more likely outcome, like similar plays, consider this a stay away situation.
Low Chances of Another XELA Stock Squeeze
There’s another catalyst at play with Exela shares (more below). But its main catalyst remains the possibility that it again experiences en-masse buying by retail traders looking to profit from what could be described as the meme squeeze trend.
In other words, heavily shorted stocks that have caught the eye of r/WallStreetBets and other stock trading forums. Downplaying the continued power of this factor may be a fool’s errand. After all, after the initial meme stock craze fizzed out in the spring, who would’ve expected it to quickly experience a second wave, as it did around two months back?
But just because things repeated themselves, doesn’t mean the third time is going to be a charm. Why? Because more is pointing to the overall trend fading out, rather than coming back for another encore. Why? Again, because meme stocks are running out of new buyers.
As a Forbes.com commentator broke it down, now that the trend is losing momentum, the cohesion that led traders to not sell will fade further.
In turn, expect those who once held with “diamond hands” to start scrambling to cash out, before shares fall back to a price reflective of their fundamentals. What does that mean for XELA stock? Unfortunately, a price well below where shares change hands today.
A Low-Margin Business
At first glance, a re-valuing of Exela Technologies based on its fundamentals may not seem like bad news. But as InvestorPlace’s Ian Bezek detailed on July 19, there are pros and cons when it comes to its other catalyst, a turnaround of its underlying business.
A successful turnaround, funded by the secondary offerings of XELA stock, could result in an outsized move higher for shares. Yet this may be limited by the dilutive impact of said secondary offerings. Also, turning itself around may be a case of easier said than done.
How so? In mid-July, one Seeking Alpha commentator laid out why a turnaround doesn’t have much chance of happening. Despite efforts to digitize its business model, this remains a low-margin, labor-intensive business. This could curtail its ability to cut costs/improve profitability.
Without progress with a turnaround, it’s going to be hard for shares to hold steady, much less bounce back from here. This doesn’t mean shares are heading to zero. But a move back to where it traded for before the latest meme squeeze (under $1.50 per share) seems like the most likely outcome from here.
Why This Is a Stock to Avoid
Sure, it’s possible for Exela, with 23.6% of its float sold short, to get meme squeezed again. But the way this trend is going, it’s not something you can count on. Instead, expect shares to become more valued on their fundamentals going forward.
Yes, in theory this could result in a big payoff for investors diving into this penny stock today. It may be selling the “story” that it’s modernizing its business model. That’s clear from its new offerings, like DrySign, which is going after a market dominated by larger, better capitalized companies like Adobe (NASDAQ:ADBE) and Docusign (NASDAQ:DOCU).
For now, though, this is still mostly a low-moat, labor intensive business, with limited ability to raise its margins.
So, with the merits of buying it as a short-squeeze or as a turnaround play debatable, what’s the best move with XELA stock? Ahead of it pulling back further, consider it a stock to avoid.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
