Don't trust the bounce in cruise stocks, traders say after analysts call 'inflection point'
Cruise stocks are climbing.
Shares of Carnival, Royal Caribbean Group and Norwegian Cruise Line Holdings surged Friday after Barclays analysts upgraded all three stocks to overweight from equal weight, saying the group was "nearing an inflection point."
The firm cited the Centers for Disease Control and Prevention's upcoming announcement regarding the end of its no-sail order on Sept. 30 as a possible near-term catalyst. Analysts wrote that while the organization was likely to extend the mandate, it could offer some positive commentary on its outlook for the industry amid the ongoing coronavirus pandemic.
Norwegian CEO Frank Del Rio told CNBC on Tuesday that while bookings are down for 2021, "pricing has held up well" and he expects it to be an "OK year."
Norwegian, Carnival and Royal Caribbean shares closed up nearly 14%, 10% and 8%, respectively, on Friday.
Those considering buying the bounce should ask themselves a few questions first, Gina Sanchez, founder and CEO of Chantico Global, told CNBC's "Trading Nation" on Friday:
"Is the demand enough in 2021 to help them make up for the big debt that they had to take on in the interim? … Can they survive from here until all of their bookings come to fruition?"
"I think we'll be into 2021 by the time we understand whether or not the debt dynamics are still working against these cruise lines," she said. "The benefit that cruise lines have is that they do have really big margins, and so they should be able to, with enough capacity and volume, make up for all of the debt they've had to take on. I think, however, there are a lot less riskier plays in this travel space."
Sanchez added that it's worth taking "a less levered approach to the bounce and the resurgence of mobility and travel," particularly as many of the underlying companies begin to offer more and more generous cancellation and rebooking options.
Hotels in particular could ultimately be "big winners" as they have less debt than the cruise lines, positive free cash flow and strong margins, she wrote in a Friday email to CNBC.
Craig Johnson, senior technical research analyst at Piper Sandler, pointed out that all three major cruise line stocks have made significant strides since the March bottom.
"These stocks probably should've been bought in March, should've been bought in April, should've been bought in May, and an upgrade coming now feels pretty late to me," he said in the same "Trading Nation" interview.
Still, it's not a "terrible" place to buy if you must, Johnson said, pointing to a chart of Royal Caribbean, which closed at $64.59 on Friday.
"I think you can see some more upside, but you've got to get a close above this kind of 200-day moving average at 69.50," Johnson said, warning that "there's so many stocks in the market right now that I see that are running right up to that declining 200-day moving average and that are failing."
"I would [be] more comfortable trying to trade this on a break above that, he added. "Get above that sort of 69.50-ish level, you've got to move back up to 100," he said. "I think you can get there, but I think it's probably going to take you probably 24 months."
As such, this upgrade is not one to chase, in Johnson's book. Instead, he suggested trimming on the move up and waiting for another leg lower before buying in for the long haul.
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