With multiple lifelines now in place, it’s time to consider buying Carnival (NYSE:CCL) stock. After all, it has an ironclad “travel insurance policy” from the options market that’s designed to keep investors afloat. Let me explain.
It’s been a terrific several weeks for the stock market since bottoming in late March. The benchmark S&P 500 has rallied as much as 35%. And it’s no surprise market heavyweights Microsoft (NASDAQ:MSFT) or Apple (NASDAQ:AAPL) have been instrumental in capturing those hefty gains. But the buck hasn’t stopped there. And among others, Carnival is proof of that.
Many once deathly ill looking stocks from the novel coronavirus’ hardest hit industry groups have performed admirably for their shareholders. From restaurant stock Chipotle (NYSE:CMG), building supplies giant Home Depot (NYSE:HD) or mobile financial payments upstart Square (NYSE:SQ), stock returns since the March bottom have easily surpassed the relief felt by the broader averages. And they’re not alone.
Carnival’s rally of roughly 77% offers its own proof of membership into this once ignominious grouping of stocks. But Carnival shares have also remained cautiously different in some respects and for good reason.
Chipotle, Home Depot and Square have all decisively repaired what many feared as long-term, broken price charts. In large part, those abrupt turnarounds are the result of those businesses having picked up the pieces while quickly learning to operate successfully, to various degrees, within today’s socially distanced environment.
The same of course can’t be said for Carnival. Despite the gains in the price of CCL stock, a cursory glance of the stock’s chart still points at potentially damaged goods. Shares are about 73% beneath 2020’s January highs. Also, unlike the aforementioned businesses, all Carnival cruises have been cancelled through June 26. Some routes will even remain offline until 2021.
There’s also the likely stigma for Carnival and for that matter, peers Royal Caribbean (NYSE:RCL) and Norwegian Cruise Lines (NYSE:NCLH). Among the industry’s well-known demographics, the question remains what seniors, families or maybe newly wedded couples will book a cruise once the official green light for business has resumed?
CCL Stock Monthly Stock Chart
Source: Charts by TradingView
To be clear, in the realm of risk assets, Carnival has its share of real and perceived problems. Aside from what’s been touched upon, Carnival’s negligent actions during the Covid-19 outbreak and the company’s longer-term potential cash burn are also potential threats going forward. Nevertheless, interesting developments on CCL stock’s price charts look promising today.
Technically, Carnival has the earmarks of a turnaround stock that now appears to be bottoming. Daily and weekly stochastics are trending higher inside neutral territory following bullish crossovers. That’s good to see. At the same time, the provided monthly chart suggests the monthly pattern could be following suit.
The stochastics of CCL stock’s longer-term chart is on the cusp of a bullish crossover inside of the oversold range. Combined, the secondary indicator is offering strong support across multiple time frames for a bottom to emerge. What’s more, pattern wise, the evidence for a larger rally is also increasing on the monthly chart.
Since forming a daily chart double bottom in early April, shares of Carnival have managed to establish a bullish hammer on the monthly view. Reinforcing the hammer’s bullish tendencies, the candlestick has developed around the 2008 – 2009 financial crisis low with the body completing above the historic low on record-breaking volume. In total, the case for a bonafide climax low has rapidly grown.
For like-minded investors who are optimistic of a bullish outcome, but appreciative of Carnival’s stiff monthly volatility and uncomfortable relying on a simple stop loss to guard against risk, Carnival’s options market is a great way to participate with a vastly improved risk profile. One favored solution is to buy the slightly out-of-the-money Oct 17.5 / 25 call spread.
Priced for $1.40 with shares at $13.90, this bull vertical begins to build intrinsic value modestly above April’s hammer high as confirmation of a monthly bottom signals. And with more than five months of calendar life to allow Carnival to sail higher, guaranteed downside protection of about 10% and upside potential of 435% if shares can find a bit of fortuitous wind at their back, this looks like a nice compromise strategy without really having to settle on CCL stock completely.
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.
