Bottom fishers have rounded the wagons on cruise ship stocks and are scooping up shares at a rapid pace, speculating that the industry will bounce back later this year and into 2021. Healthy advance bookings have underpinned this buying pressure, suggesting that Americans will return to their old travel habits as soon as possible. If true, positions taken at these depressed levels could pay off handsomely in coming quarters.

However, there are no guarantees that these companies will survive, because secondary offerings and/or new loans are struggling to match high cash burn rates, raising the threat of bankruptcies in the fourth quarter and beyond. Cruise ship operators are currently targeting the second half of the third quarter for the resumption of operations, but that's equally dangerous because it will take just a single outbreak and quarantine to trigger a fresh wave of cancellations.

The COVID-19 infection rate is receding as the Northern Hemisphere heads into the warm summer months, but the virus' seasonal impact is becoming clearer by the day, with high odds for a second wave when temperatures drop in September and October. None of these companies have the cash needed to survive into spring 2021 without at least limited revenues, raising doubts about the wisdom of buying these stocks right now.

Sector accumulation readings have also shot higher since March, with several components returning to pre-crisis levels, but secondary offerings are responsible for part of the uptick, with new shares filling portfolios. This dilution will undermine potential gains in coming quarters because the higher float and outstanding shares means each individual share is worth less than it was at the same price just a few months ago, making it harder for upticks to mount contested levels. 

Chart showing the share price performance of Carnival Corporation & Plc (CCL)

Carnival Corporation & Plc (CCL) topped out well before the current crisis, posting an all-time high at $72.70 in February 2018 and entering a decline that carved a lower high in February 2020, just ahead of a near-death spiral dumped the stock to a 17-year low in the single digits. The sell-off broke support at the 1999, 2001, and 2009 lows, establishing new resistance mid- to upper teens. The subsequent bounce topped out at $17.07 a week later, with no upside in the past two months.

The monthly stochastic oscillator is trying to cross into a buy, cycle while the daily on-balance volume (OBV) accumulation-distribution indicator shot up to an all-time high just a few weeks after the company issued a 62.5 million share secondary offering. Overall, this price action looks like a triangular holding pattern at heavy resistance while market players wait to see if the company can resume operations this summer.

Chart showing the share price performance of Royal Caribbean Cruises Ltd. (RCL)

Royal Caribbean Cruises Ltd. (RCL) posted an all-time high at $135.65 in February 2018 and eased into a trading range with support in the upper $80s. A January 2020 breakout attempt failed within 60 cents of the prior high, yielding a vertical decline that dropped the stock to an eight-year low in the upper teens on March 18. The subsequent bounce also topped out after a week, with resistance near $50 generating two pullbacks in the past two months.

The stock is hovering just under the March high, which has narrowly aligned with 50-day EMA resistance. Unlike Carnival, Royal Caribbean has broken just a single long-term support level, at the 2016 low in the mid-$60s. OBV has also lifted to an all-time high, but the company hasn't issued a secondary offering so far, instead relying on higher debt levels. Another rally leg should be achievable with these inputs, perhaps reaching resistance at the broken 2016 low.

The Bottom Line

Bottom fishers are loading up on cruise ship stocks, betting on a recovery later this year and in 2021.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.