A bullish market tide has been lifting most risk assets of late. Yet shares of distressed Royal Caribbean (NYSE:RCL) have been left to drift in bearish technical waters. Now though and following earnings, is it time for investors to finally board RCL stock with an eye on calmer conditions ahead?
The novel coronavirus and ensuing Covid-19 pandemic have been challenging to say the least for cruise line operator Royal Caribbean. Not that it’s alone. If misery loves company, Carnival (NYSE:CCL) and Norwegian Cruise Lines (NYSE:NCLH) are in the same boat. Still, operations have been remained shuttered since March. What’s more, under RCL’s current no-sail policy, its cruises aren’t set to resume until the end of July and there’s always the chance of further delays.
Harmful industry publicity, as a handful of cruises were left to self-isolate on the high seas for weeks in March, roiled the shares. Then, difficult to navigate, socially distanced policies cast doubt on most vacationing, let alone on a ship in the middle of the ocean. Consequently, it should come as little surprise that the broader market’s dazzling recovery hasn’t proven nearly as rewarding for longer-term shareholders of Royal Caribbean.
Despite the stock enriching a few investors as it more than doubled in price from its absolute low on March 18, RCL remains underwater by nearly 70% year-to-date. Shares are also trading at stock prices first reached more than 20 years ago.
The good news is Wednesday night’s earnings release hints that Royal Caribbean’s current stranding isn’t likely to turn into a deeper and inescapable sinking.
Reaction to RCL’s report was good in Thursday’s session. That’s not to say heavy quarterly losses and dismal-sounding declines in sales weren’t announced. They were. But investors are resting easier following some confidence-boosting clarity from management.
Shares ended the session firmly higher by about 6.5% after being up more than 10%. A water-logged performance in the broader averages, as well as the weight of a couple market leaders like Netflix (NASDAQ:NFLX) and Enphase Energy (NASDAQ:ENPH), brought indexes below the water line.
Highlights from the quarterly announcement included much-needed liquidity reassurances from management. Following a recent capital raise of more than $3.3 billion, the company stressed its ability to stay afloat for an entire year even if operations remain on hold. Further, access to additional funding is available, if required. That’s certainly good news given Royal Caribbean’s credit downgrade last week to a junk bond rating in the aftermath of tapping the debt markets.
Lastly, RCL is seeing surprisingly strong new advanced organic bookings. And with management guiding expectations that reasonable load numbers of 30% to 50% should allow for an EBITA profit once operations are resumed, Thursday’s bid has some good-looking supports behind it.
RCL Stock Monthly Stock Chart
Source: Charts by TradingView
On the RCL price chart, investors electing to board the stock as an investment should be prepared for volatility. It’s anticipated the latest information should have a calming effect on shares and increases the likelihood of a bottom being in place. Still, it should be appreciated Royal Caribbean’s low is more than 50% beneath current prices. That could lead to substantial paper losses or worse, even if the low remains intact.
Another problem is the company’s ability to turn this quarter’s massive loss into an eventual — and steadier — profit stream. Investors are obviously enjoying RCL’s report. Still, operational uncertainties remain. Secondly, what if a second wave of Covid-19 hits, causing future cruise line shutdowns in its wake? It’s the type of risk shareholders should be prepared to handle.
With those caveats out of the way, Royal Caribbean’s climatic sell-off does lend itself to a stock positioned as a turnaround play. The provided monthly chart speaks for itself. But as with its peers, I’d recommend exposure using a limited risk options strategy to define and lessen risk relative to buying shares outright.
Today’s recommendation is to consider the purchase of a less-capital intensive, slightly out-of-the-money intermediate bull call spread. Currently, the September $45 / $50 or $50 / $55 call verticals are two which look reasonable given the circumstances.
Bottomline, this type of strategy will require shares to continue rallying in order to allow for profits at expiration. But if RCL does move higher the benefits of leverage could also be huge compared to returns for shareholders. And defensively, investors don’t have to worry about Royal Caribbean shares completely failing or sinking sufficiently and potentially causing much larger losses due to bad judgment during adverse volatility.
Disclosure: Investment accounts under Christopher Tyler’s management do not own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.