Investors are growing worried about the cruise industry amid an uptick in omicron cases. Royal Caribbean Cruises (NYSE:RCL) recently announced that it had paused the sailing of three cruise ships “in an abundance of caution.” Furthermore, it was announced earlier this week that the cruise company had called off its Spectrum of the Seas cruise after nine guests on a previous trip were identified as close contacts to a Hong Kong coronavirus case. While this is bad news for investors of RCL stock, it represents great news for a popular short research firm.
On Jan. 6, Hindenburg Research announced via its Twitter (NYSE:TWTR) that it was short RCL stock. The firm cited high valuations, coronavirus cases, rising costs and lack of demand as the factors behind its bear case. Furthermore, Hindenburg called RCL stock “one of the most dislocated ‘re-opening’ stocks on the market today.”
Hindenburg has been on a short selling frenzy. In the past year, the firm released short reports on DraftKings (NASDAQ:DKNG), Clover Health (NASDAQ:CLOV) and Lordstown Motors (NASDAQ:RIDE), among others.
With that said, let’s dive into the details on Hindenburg’s newest short.
Hindenburg Short Report Pressures RCL Stock: 7 Things To Know
- First, Hindenburg notes that Royal Caribbean’s enterprise value recently passed its pre-pandemic highs, despite nearly doubling its debt to $10.1 billion. Royal Caribbean now has over $26 billion in liabilities and roughly $17 billion in net debt. Hindenburg explains that the existing liability and debt will “almost [necessitate] extensive dilution of existing shareholders.”
- Furthermore, Royal Caribbean’s number of shares outstanding has increased dramatically since mid-2020. Hindenburg adds that “The March 2020 bear case for RCL is stronger than ever, yet the company’s stock price already reflects a full-scale return to normal.”
- Hindenburg believes that the coronavirus’ effects on cruise travel isn’t over yet. The firm expects that the Centers for Disease Control (CDC) will extend its Conditional Sailing Order (CSO) after it expires on Jan. 15, as evidenced by the recent Level 4 Travel Health notice for cruise-ship travel.
- Additionally, a recent Jefferies survey shows that 48% of participants reported that they were less likely to go on a cruise due to the coronavirus pandemic. This bodes poorly for all cruise stocks.
- In the case of a lag in demand, Hindenburg notes that Royal Caribbean may be forced to offer incentives and lower prices for cruises. In turn, this could lower revenue.
- Lower revenue paired with rising costs could have devastating effects for RCL stock. The price of oil has risen steadily since December, which would directly increase Royal Caribbean’s costs.
- Finally, Hindenburg disclosed alongside its report that it is short shares of RCL stock.
On the date of publication, Eddie Pan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
