Perception is not always reality. Often, sentiment skews the way we see things. There is no doubt that cruise line businesses are still struggling from the pandemic. In fact, for all intents and purposes, they are still closed for business. Yet stocks like Carnival Cruises (NYSE:CCL) are doing OK given the circumstances. CCL stock for example is up almost 80% in a year.
But if you consider periods before February 2020 then it’s definitely suffering. Over the span of two years, investors are down half their investment.
Therefore, it is important to frame this opportunity from here in the proper cadre.
First, we must acknowledge that the indices are still breaking records. The fact that the sector is struggling this badly is concerning. The strength in the indices is a risk to CCL. If they finally decide to correct, this will add tremendous downside pressure even more on the stock today.
CCL Stock Fans Are Strong
Kudos to the fans of this industry stocks because they are resilient. I’ve never seen a business completely interrupted for 12 months and the stocks survive this well. I made this point in January as the basis for a bullish bet. CCL rallied 40% into mid March. The power of faith is palpable.
In a twisted logic, them being down a lot is a show of strength. Management has gone to extremes to shore up the balance sheet. They had help from the government but a lot of credit goes to the courage they’ve had. A company must have a lot of confidence in its ability to execute to raise debt during the pandemic. This is a testament that they see better days ahead, and therein lies the actual thesis.
Assuming that life will continue its progress back to normal, CCL stock will have a recovery coming to it. I doubt that it will soar this year, therefore investors in it must have patience.
This is where I also think that using options could be a suitable alternative. Buying CCL stock now commits the investor long right away. There’s absolutely no room for error, so they have to stay in it until it profits. Selling puts below stock support levels builds a moat. For example, an investor can sell the CCL October $20 put and collect more than $2 per contract. The transaction results in a net credit of $2 per contract. The break-even on it would be $18 per share.
If the stock falls to that, someone who bought the shares today would already be down 30% on their investment. Compare that to if they had sold the naked put, they would be still even. Moreover, selling puts does not need a rally to win. The drawback is that it has limited upside equivalent to a 7% rally.
Opportunity Requires Patience and Moderation
It makes sense to blend strategies so it’s not an either-or situation. Besides, when the stock markets are near all-time highs, it also makes sense to break up the entry positions. Conviction should be modest. There are a lot of new things that we’ve never seen before. I assume that I am missing a piece of the puzzle and I don’t even know it yet. This keeps me humble with my conviction and open to the idea of being wrong. Leaving room for error is the only way I could manage my risk. Going all in is hazardous.
CCL stock fundamentals remain in shambles therefore they will not provide support. Before the pandemic, its revenues were almost $21 billion, netting $3 billion in profits. Currently they are bleeding $10 billion with no relief yet. They have raised assets but the debt levels are also rising sharply. The statistics are useless because this is not normal operating procedure. They are still in survival mode. I feel for the leadership team because they have a mountain to climb. Investor faith in the company will play a big role.
Technically, CCL stock has breakout opportunities lurking above current prices. There is support below so then the bulls can trigger a 30% rally with a little effort soon. It won’t be easy and there will be resistance zones especially around $29 and $33 per share. It all has to start somewhere and patience is a virtue in this case.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.