Royal Caribbean (NYSE:RCL) and its cruise-line peers are still widely viewed as pandemic-reopening plays. But those equities got some help last Friday when Barclays upgraded the cruise lines, taking RCL stock to “overweight” from “equal weight.”
Upgrades are nice for the owners of the stocks that are upgraded. Barclays analyst Felicia Hendrix put a $68 price target on RCL stock, versus yesterday’s close of $66.09.
“We believe we are nearing {a turning point},” said Hendrix in a note to clients. “While we may be early, we believe the risk/reward is the most attractive in our coverage universe. Investors who have previously written off cruise stocks should begin to revisit their models.”
For its part, Royal Caribbean is making strides to get back to the seas. Last week, the company was one of two cruise operators that approached the Centers for Disease Control and Prevention (CDC) with proposals aimed at getting passengers back on ships.
Those efforts include the standard, “new normal” fare of taking passengers’ temperatures and requiring them to wear masks while aboard cruise ships. The CDC currently has the industry under a “no sail” protocol, but it’s reviewing the cruise operators’ proposal.
RCL Stock Is a Pent-Up Demand Play
Like so many of the travel-and-leisure stocks hammered by the novel-coronavirus pandemic, cruise operators and their investors are largely beholden to the notion of pent-up demand, an oft-used phrase over the course of the pandemic.
Hendrix, the Barclays analyst, mentions pent-up demand in his note, and there is data to suggest that cruise operators, including Royal Caribbean, are booking passages for 2021 at impressive rates.
“Given the current global situation and uncertainty, we’ve been both encouraged and humbled by the volume of bookings we’ve been receiving for 2021,” Royal Caribbean CFO Jason Liberty said recently. “Since our last earnings call, bookings have averaged more than double the levels seen during the first eight weeks of the global cruise suspension.”
This is where things get interesting and the potential vulnerabilities of RCL stock and other cruise equities come to light. Currently, many travelers are leery of boarding planes to return to Las Vegas, and California’s Disneyland remains shuttered, indicating that tourists remain wary of traveling because a Covid-19 vaccine still isn’t available.
Many of the advanced bookings on Royal Caribbean cruises were made by travelers who are wagering a vaccine will be readily available early next year. That’s not the worst bet in the world, but it’s not a lock, either. Some so-called experts are saying that most Americans won’t be vaccinated until the third quarter of 2021. And, as of now, there’s no law requiring anyone to get a Covid-19 vaccine.
In other words, Royal Caribbean and its peers are highly levered to coronavirus news. If there are failures on the vaccine front or major upticks in case counts in their ports, cruise stocks will probably be negatively affected.
Other Ideas
Investors who are looking f0r stocks that will benefit from the reopening of the economy can do better than cruise lines. In addition to cruise lines, airlines and casino companies will also benefit a great deal from the easing of the pandemic.
Investors should choose casino chains over the other two for a simple, obvious reason: Airlines and cruises require their customers to travel with many other people, upping their dependency on vaccines.
Conversely, investors can reduce their risk and still get some benefit from the easing of the coronavirus crisis with casino operators. The best bets in the sector are either names with many properties that gamblers can drive to or those that are tapping into the booming iGaming and online-sports wagering markets. Of course, bettors don’t have to leave their homes to access those offerings.
So investors can do better than rolling the dice on cruise stocks.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
