Royal Caribbean (NYSE:RCL) stock finally caught a break. After sliding for most of the past month, Royal Caribbean shares soared more than 20% on Wednesday on elevated trading volume.
News of a potential novel coronavirus vaccine has the travel stocks surging again, and the cruise lines are right in the middle of the action. Before you get too excited, however, take a moment to consider Royal Caribbean’s broader business outlook. While the vaccine news is a big plus, it’s not enough to justify owning the stock as a long-term investment. Here’s what you need to know.
Vaccine Development Is Advancing
On Tuesday, after the market closed, Moderna (NASDAQ:MRNA) announced favorable results for its Covid-19 vaccine candidate. The company told us that its vaccine produces a strong immune response in recipients. The company’s trial was small, and there are some obstacles, such as the vaccine potentially requiring a booster shot to be effective.
However, it appears to be a very positive development on the whole. This is causing a significant run-up in economic recovery/re-opening stocks.
Cruise lines, like Royal Caribbean, have been the hardest-hit with the pandemic. The cruise companies had intended to start sailing again this summer, the second wave of the virus has caused that timeline to slip significantly. This vaccine news, if it holds up, should give cruise companies a real timeline toward getting back to business as usual.
The vaccine news could also help cause a rotation from growth stocks to value names. Since March, investors have primarily focused on sectors such as software-as-a-service firms and healthcare companies whose businesses are growing or are at worst neutral as a result of the virus.
Meanwhile, stocks with direct exposure, such as banks, retailers and travel stocks have underperformed dramatically. The Nasdaq Composite Index has already hit new all-time highs, while most stocks with direct Covid-19 exposure remain way down from their pre-virus levels.
Catalyst for Travel Stocks
We could see a serious reversal of this trade in coming weeks. Up until now, we’ve had a ton of false starts around economic re-opening. While the skies would look clear one week, the next week we’d have states shutting things back down. California’s recent move to shut restaurants and bars again was particularly demoralizing. The vaccine news could finally break this pattern and give vulnerable companies like cruise lines room for a sustained rebound.
Improvement on the Covid-19 front should create a sizable rebound in travel companies, like RCL stock. However, don’t assume things are actually going back to normal anytime soon. The virus has caused astounding economic damage.
Even if we could get this vaccine widely-distributed tomorrow, it’d be too late to put the genie back in the bottle. Unemployment is way up and many businesses have shut down permanently. We aren’t returning to 2019 levels of economic activity within a quarter or two, regardless. And Royal Caribbean, which sells entirely discretionary services to mostly middle class folks, isn’t going to see business return to normal immediately.
RCL Stock Verdict
If you’re trading Royal Caribbean, Carnival (NYSE:CCL), or other travel stocks, this vaccine news is a gift. You should get one more big surge of trading interest that could cause a major lift for share prices in the short term.
In coming weeks and months, however, people will figure out that even as the virus fades, Royal Caribbean remains a deeply-wounded company. It’s not realistic to return to pre-Covid-19 share prices. The company lost too much money and weakened its balance sheet too much to return to pre-virus prosperity. Remember that it took on billions in additional debt this May at an 11% interest rate. This creates a huge ongoing interest burden that will be an anchor weighing the company down even if the industry returned to normal levels of activity.
Ironically, on Wednesday, RCL stock soared far more than Moderna; Royal Caribbean was up 21% while Moderna jumped just 7%. Normally, you’d expect that the vaccine-maker would get the biggest bump on its own clinical trial results, but traders were desperate for anything positive in the travel names. That tells you something about sentiment.
As such, if you own Royal Caribbean here, enjoy the rally, but keep one eye on the exits. This could be the last good opportunity to sell RCL stock before shares turn into a big value trap.
Royal Caribbean’s operating business is likely to remain depressed well into next year or even longer. RCL stock is vulnerable to downside if the vaccine development program suffers any setbacks. As such, Royal Caribbean is attractive only as a short-term trade.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.