On June 16, the U.S. Centers for Disease Control and Prevention (CDC) said that it didn’t know when it would give the green light for cruise ships to start sailing again. Royal Caribbean (NYSE:RCL) planned to be back in business on Aug. 1. However, the CDC’s latest comments suggest fall might be a more likely scenario. RCL stock and the rest of the cruise operators took a hit on the news.
What was already a murky situation just got a whole lot murkier.
If you are thinking about buying Royal Caribbean’s stock on the dip, you might want to consider your options before doing so.
The easiest way to make a bet on RCL without exposing yourself to excessive company risk is to buy an ETF that owns the cruise operator.
Why an ETF for RCL Stock?
Recently, the ETF with the highest RCL weighting was the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD), at 2.22% of its portfolio, the second-largest holding behind Norwegian Cruise Line Holdings (NASDAQ:NCLH) at 2.25%, and just ahead of Carnival (NYSE:CCL) at 2.16%.
Now, while it’s true that a 2.22% weighting isn’t all that much because it’s equal-weighted, you’re getting a bunch of the upside without all of the downsides.
What do I mean by this?
The ETF is equal-weighted. That means each of the 64 stocks starts out each quarter with an approximate weighting of 1.56%. All 64 are rebalanced at the end of the quarter, and then the process starts anew.
The last would have been in March. The next one should be after the markets close on June 19. As you can see, RCL stock has generated 66 basis points of gains over the past three months – 2.22% less 1.56%. Not surprisingly, in the past three months from March 20 to June 17, Royal Caribbean’s stock has more than doubled.
A Risk That Is Industry-Specific
I know what you’re thinking.
If you wanted to bet $1,000 on RCL back in March around the time of the rebalance, today you’d have almost $2,500. If you had invested the same $1,000 in the ETF back in March, today, you’d only have about $1,500.
However, the risk you would have taken buying RCL in March, when it might not be sailing for another four to eight months, was significantly higher than investing in 64 consumer discretionary stocks. Many of these companies had online revenue to reduce the pain inflicted by the novel coronavirus.
So, unless you have a bunch of stocks in addition to RCL, to undertake the company- and industry-specific risk that presently exists for the cruise industry, to invest at this point is simply foolish. This is especially relevant when you consider that in 22 states, including Florida, Covid-19 is on the increase.
Donald Trump might want to sweep this under the rug, but medical professionals can’t – and they won’t.
In recent articles, I have argued that aggressive investors might take a flyer on the cruise stocks. But for everyone else who wants to sleep at night, RCL and its peers ought to be off-limits.
Invesco’s ETF provides you with an option.
The Bottom Line on RCL Stock
An analyst from Nomura Securities believes the CDC is to blame for the uncertainty in the cruise industry about when they can go back to sea.
“The issue is not that the industry has been passive in developing health protocols. Quite the contrary. In our view, the hurdle lies with the CDC’s unwillingness to discuss, debate and mutually implement the highest standards of passenger and crew healthcare,” Nomura stated recently. “Their messaging seems to be don’t even think about resuming operations, even if most businesses are reopening, resorts and casinos are welcoming guests, and airlines are taking off with many flights near capacity with not a peep of objection from the CDC.”
While it’s true that the cruise lines do appear to be treated differently than American tax-paying companies, it’s also true that cruise ships possess a unique set of issues that other travel-related businesses simply don’t face.
Yes, there have been packed flights, but those are generally for a short duration. As we’ve seen over the past three months, when things go wrong on cruise ships, they go abysmally wrong – not to mention, deadly.
But I digress.
Other cruise lines such as Disney (NYSE:DIS) have canceled sailings into October. That may soon be November or later.
If you want to bet on Royal Caribbean, Invesco’s ETF seems like a smarter way to play it.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing he did not hold a position in any of the aforementioned securities.
