The plight surrounding Royal Caribbean Cruises (NYSE:RCL) reminds me of car dealerships’ go-to sales pitch, but in reverse. During negotiations, salespeople will often remark that their customers are really hurting them to convince them that they’re getting the better end of the deal (they’re not). Here, the cruise line is trying to convince investors that the industry is healthy. With any luck, they won’t look at the RCL stock chart.
If they did, they’ll recognize that shares of Royal Caribbean have been utterly devastated. But by presenting a picture of optimism and resilience, cruise ship operators are attempting to create an aura that everyone else is taking advantage of discounts and generous offers, such as extended cancellation policies. Thus, prospective customers are missing out. They’re not. In this case, travelers — or the lack thereof — really are hurting the industry.
However, I’ve got to give the ship operators credit for their marketing moxie. For instance, Carnival (NYSE:CCL) announced that it plans on resuming operations on Aug. 1. Granted, these are limited operations, featuring eight ships departing from Florida and Texas. Still, this is a remarkable show of intent. Does it bode well for RCL stock?
Before you board cruise ship investments, I should remind you of the Norwegian Cruise Line (NYSE:NCLH) SEC filing describing the financial fallout caused by the novel coronavirus pandemic. Most worryingly, Norwegian fears that it may have to file for bankruptcy.
It’s difficult to overstate the crisis. From the collapse of the global economy to the dearth of discretionary consumer spending, the outlook for RCL stock is utterly horrific.
RCL Stock on Deathwatch
My InvestorPlace story last week, “30 Stocks on a Deathwatch,” included Royal Caribbean’s peers Carnival and Norwegian, but not RCL. No matter. At this point, anything that’s on the water that isn’t a deity is subject to extreme, devastating turbulence.
For one thing, RCL stock finds itself trading in perhaps the worst sector of the economy. Unlike prior recessions and slowdowns, cruise ship operators could always depend on most of its consumer base to continue traveling. Sure, a 10% hit to revenue isn’t pleasant, for example. But at least they would be operating inside a margin of normalcy.
There’s nothing normal about what we’re seeing today. Tragically, the coronavirus is an equal-opportunity disrupter. Having money doesn’t make one immune from Covid-19 infections. And because this is a health-related crisis, many people are simply afraid of venturing out, let alone traveling aboard a giant petri dish.
Moreover, this fear doesn’t have a nationality. Recently, The Guardian reported that many Britons are scared to go outside. Additionally, 70% of them oppose opening the economy until the virus is under control. Given that cruise liners depend on international demand, this is terrible news for RCL stock.
If that wasn’t bad enough, the industry must contend with a likely untenable PR nightmare. During the initial outbreak, cruise ships represented the face of the virus. In an unprecedented situation, many ships found themselves stranded, with many ports denying entry.
What should have been a vacation turned into a prison sentence. Such a memory won’t fade for a while.
Then, you must factor in that for several cruise ship workers, the nightmare continues. As CNN reported, cruise passengers have gone home but workers remain quarantined on board. This is a constant reminder of the troubles.
No Upside Potential
If you think about it, cruise liner-based investments like RCL stock are absolutely the worst place to park your money; that is, unless you’re the type to burn cash in your backyard.
True, the oil industry hogs most of the headlines, especially with prices dipping below zero last month. Plus, you have the fact that many oil tankers are waiting forlornly in our territorial waters, looking to feed demand that simply doesn’t exist.
But here’s the thing — oil has intrinsic value. You can’t say the same about cruise ships. No one wants to see this form of travel and vacationing go under. But most operators don’t have the financial strength to wait out months of decimated revenues. And who really knows when this crisis will end?
Therefore, the smart play is to avoid RCL stock. Actually, this is one of those names where, if you truly understand your risk profile, shorting could be in the cards. This time, it really is that bad.
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. As of this writing, he did not hold a position in any of the aforementioned securities.