Carnival Is a Buy Despite Losing $2 Billion in Q3

Carnival Corp. (NYSE:CCL) released Q3 earnings, and despite losing $2 billion for the three months, buyers are snatching up shares. Over the past four trading sessions, CCL stock is up 15%. The gains were even higher, but profit-taking struck on Monday, driving prices well off the highs.

Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

So how do you square a company lighting $2 billion on fire with its stock price soaring? Simple. It’s all about the future. Advanced bookings for the back half of 2022 are ahead of 2019’s substantial numbers.

During the earnings conference call, CEO Arnold Donald was upbeat about the company’s restart.

“With existing demand and limited capacity, we are focused on maintaining price – even recently with heightened uncertainty from the delta variant affecting travel decisions broadly,” he said. “We opened bookings earlier for cruises in 2023 and we’re achieving those bookings with strong demand and good pricing. And based on that success, we’ve begun to launched 2024 sailings even earlier.”

Earnings reports, by their very nature, are backward-looking. Stocks, by contrast, are forward-looking. In this case, losing a couple of billion dollars wasn’t enough to dampen the mood for Carnival’s prospects.

The Reopening Trade Is Back

iShares Russell 2000 ETF (IWM) with powerful rally.
Source: The thinkorswim® platform from TD Ameritrade

Carnival’s stock rally didn’t happen in a vacuum. The past week has seen a reawakening in so-called “reopening” stocks. Cruise lines are on the mend, but so too are airlines, hotels, retail, and other economically sensitive stocks.

On Monday, the heavy rotation into these names was on full display. While the S&P 500 closed down 0.29%, the iShares Russell 2000 ETF (NYSEARCA:IWM) finished up 1.52%. Divergences of this magnitude are extremely rare and reflect some serious sector rotation that favors tickers like CCL stock.

It’s not a coincidence that this rally occurred while bond yields were breaking out. In response to last week’s Federal Reserve meeting, the 10-year yield finally pierced 1.39% and saw swift follow through to 1.5%. It may not sound like much, but that’s a relatively big move for interest rates. Moreover, during the heyday of the reopening trades earlier this year, bond yields were surging as well.

So consider the recent uptick a good omen for the likes of CCL.

CCL Stock Chart

Carnival Corp (CCL) stock chart with bullish breakout
Source: The thinkorswim® platform from TD Ameritrade

The past three months have provided an insightful lesson in trend reversals.

CCL entered July in a downtrend, then proceeded to build an ascending triangle. The series of higher pivot lows reflected increasing demand, but we could never achieve lift-off due to stiff resistance at the 200-day moving average.

Fortunately, earnings finally lit a fire under buyers, and we jammed through the 200-day last week. The follow-through and volume crescendo is everything you want to see for confirmation.

While prices could certainly retreat over the coming days to digest the overbought conditions, any dips should be viewed as gifts to be bought.

2 Ways to Play

The options market provides two major paths to play. The first offers a high probability of profit. We’re talking odds of success that range between 70% and 90%. But, as a trade-off for the attractive probability, you don’t make as much. The return on investment runs between 5% to 20%.

The second route offers a much higher return on investment, such as 100% to 150%. But, your odds of capturing the entire gain are far lower, such as 25%.

Which trade you take ultimately comes down to personal preference and risk tolerance. I’ll offer my favorite ideas for both.

The High Probability Trade: Sell the November $22.50 naked put for 53 cents.

The market is pricing your odds of success at 83%. The return on investment should be around 20%. Consider this a bet that CCL stock is above $22.50 at expiration.

The High Reward Trade: Buy the November $25/$30 bull call spread for $1.95.

You’re risking $1.95 to make $3.05, which translates into a potential return on investment of 156%. To pocket the entire gain, however, you need CCL to rise beyond $30 by expiration. The market is pricing in a 26% chance of this happening.

 On the date of publication, Tyler Craig was long IWM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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