Royal Caribbean to Join S&P 500, RCL Stock Remains a Buy

Royal Caribbean Cruises Ltd (RCL) received some good news this week that promises to provide a tailwind to RCL stock for months to come. The cruise line operator will be added to the S&P 500 as of market close Dec. 4, and that means lots of built in demand is on tap.

Royal Caribbean to Join S&P 500, RCL Stock Remains a BuyIn other moves made by S&P Dow Jones Indices …

  • RCL stock replaces Bemis Company, Inc. (BMS), which moves to the S&P MidCap 400.
  • At the same time, Tyler Technologies, Inc. (TYL) will move to the MidCap 400 from the S&P SmallCap 600.
  • Montpelier Re Holdings Ltd. (MRH) will replace Tyler Technologies in the SmallCap 600.

The addition of RCL stock to the S&P 500 is by far the biggest index change, however, if only because so much cash is indexed to the broad market benchmark. Indeed, as of mid-2013, more than $5.58 trillion was benchmarked to various S&P 500 indexed mutual funds and exchange traded funds. All those funds now have to buy RCL stock in order to remain faithful to the benchmark index.

RCL Stock Set for More Gains

As for the fundamentals of RCL stock, nothing has changed. Being tapped for the S&P 500 doesn’t really signify anything special about a company. After all, the S&P 500 is not comprised of the 500 largest companies listed on U.S. markets — not by market cap, revenue or profits. Rather, the S&P 500 is selected by committee.

But, as noted, it does create demand from index funds, and that added buying pressure only helps RCL stock. Not that it needed it.

For the year-to-date, RCL stock is up 60%. The broader market is up not quite 12%. RCL is having a great year amid a fantastic bull-market run. Indeed, since the bear-market bottom of March 2009, RCL stock is up 1,200%. The S&P 500 has tripled over the same time.

The market has largely been rewarding RCL for strong growth. From fiscal 2009 to fiscal 2013 — a tough time for U.S. corporate sales growth — RCL saw revenue climb from $5.89 billion to $7.96 billion. Just as important, RCL has delivered strong increases in gross margin. For the trailing 12 months, gross margin was 34.4%, according to S&P Capital IQ, up from 31% at the start of the bull market nearly six years ago.

The market also loves RCL’s growth prospects. Wall Street, on average, expects RCL earnings to grow 29% a year for the next five years. That makes RCL stock look like a good deal, seeing as it trades for only 16 times forward earnings.

Between the compelling valuation and the forced buying from index funds, RCL stock’s prospects remain as buoyant as ever.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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