Cruise line stocks sank Tuesday after Royal Caribbean Group (RCL) said that it plans to raise additional capital to shore up its liquidity throughout the ongoing coronavirus pandemic that has crippled the industry since March. The capital raising entails $500 million in senior convertible notes and a $500 million share offering with a greenshoe option for both, putting downward pressure on the stock by diluting shareholders.

Key Takeaways

  • Royal Caribbean plans to raise $1 billion through debt and equity to shore up liquidity throughout the ongoing pandemic.
  • Royal Caribbean shares broke down on heavy volume below an uptrend line stretching back to the March selloff low.
  • Carnival Corporation & Plc (CCL) shares broke below a rising wedge pattern on decent volume, indicating downside continuation in the short to medium term.

Although a no-sail order by the Centers for Disease Control and Prevention (CDC) expires on Oct. 31, the cruise industry's future remains in unchartered waters heading into the winter months with infection numbers spiking again in many parts of the world. Below, we take a closer look at Royal Caribbean and rival cruise operator Carnival Corporation. We'll also turn to the charts to identify possible trading opportunities.

Royal Caribbean Group (RCL)

Royal Caribbean Group, which operates more than 60 ships across six global and partner brands in the cruise vacation industry, racked up a net loss of $3.1 billion in the first half of 2020. While the Miami-based company expects to resume some voyages by Dec. 1, losses could continue to mount in the coming months if the CDC extends its no-sail order into next year. On Tuesday, the cruise operator said that it's burning cash at a rate of about $250 million per month. As of Oct. 14, 2020, the stock has a market capitalization of $13 billion, offers a 4.47% dividend yield, and is trading over 50% lower on the year. Performance has improved over the past three months, with the shares gaining 22% since mid-July.

Royal Caribbean shares broke down on heavy volume below an uptrend line stretching back to the March selloff low in a move that may induce further selling in subsequent trading sessions. Those who execute a short sale at these levels should look to buy to cover their position around $51, where the price finds crucial support from a horizontal trendline. Protect trading capital with a stop-loss order placed above this month's high at $72.11.

Chart depicting the share price of Royal Caribbean Group (RCL)
TradingView.com

A short sale is the sale of an asset or stock the seller does not own. It is generally a transaction in which an investor sells borrowed securities in anticipation of a price decline. The seller is then required to return an equal number of shares at some point in the future.

Carnival Corporation & Plc (CCL)

Also based in Miami, Carnival Corporation sails a fleet of nearly 100 vessels across 10 cruise line brands. The $12.67 billion company, which has an average monthly cash burn of $770 million, posted a third quarter loss of $1.69 billion as voyage cancellations continue to plague the cruise operator. Throughout this year, Carnival has raised more than $10 million in capital, mostly through debt financing, to stay afloat during the crisis. Like Royal Carribean, Carnival expects to operate limited cruises in December, subject to health advice. Trading at $14.03, the stock has slumped over 70% year to date and 8% over the past three months as of Oct. 14, 2020.

The share price broke below a rising wedge pattern on decent volume, indicating downside continuation in the short to medium term. Short sellers who enter the stock here should look for a move down to $11.50 – an area on the chart that finds a floor of support from horizontal price action during May and June. Manage risk by setting a stop somewhere above the wedge pattern's high at $16.17.

Chart depicting the share price of Carnival Corporation & Plc (CCL)
TradingView.com 

Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors.

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