Royal Caribbean Is Headed for Rough Waters

By Eric Jackson

Royal Caribbean (RCL - commentary - Trade Now) is a high-beta consumer discretionary play that runs cheap cruises for middle-class America. Many consumer names were pummeled in the downturn that began in autumn 2008 as the market priced in the possibility that unemployment would soar and most people would only spend money in the foreseeable future on absolute necessities. Royal Caribbean was not spared its share of pain.

Fortunately, people did not have to live in bunkers for the rest of their lives. In fact, consumer spending bounced back nicely last year. Consumer discretionary stocks went on a wild move up from March 2009 to April 2010. The Consumer Discretionary SPDR (XLY -commentary - Trade Now) was up 119% from the March lows to April 22 this year. Since then, however, that ETF is down 16%.

Royal Caribbean has seen even more violent price action during this period. After bottoming under $6 at the March lows, the stock skyrocketed 484% to the April highs. The biggest reason for its rise was its debt.

Part of Royal Caribbean's large drop during the first economic crisis was due to concerns about its carrying more than $8 billion in debt, a high amount for a company with $7.4 billion in equity. Competitor Carnival(CCL - commentary - Trade Now) is much larger than Royal Caribbean, and it had more than double Royal Caribbean's revenue in the last 12 months ($13.6 billion vs. $6 billion). Yet Carnival's debt is only marginally more than Royal Caribbean's ($9.75 billion vs. $8 billion).

Many investors were concerned that Royal Caribbean would be unable to continue to meet its obligations if consumers stayed away; bankruptcy appeared to be a very real possibility. Even though the company sold itself as a cheap vacation offering, it seemed that most consumers were opting to just stay home. As the stock markets stabilized last year, though, we saw that consumers kept spending. As 2009 rolled on, the company started to have much easier comparisons that have carried into 2010.

Now, though, those comparisons are starting to get more difficult. When the company reports earnings later this month for the second quarter, it will be the first comparison to a quarter after the lows of March 2009. Things will only get tougher in the back half of this year.

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A King Among Casinos

By Eric Jackson
RealMoney Contributor
6/14/2010 5:00 PM EDT
Click here for more stories by Eric Jackson

It's been a rough two months in the market, starting with the surprising SEC charges against Goldman Sachs (GS - commentary - Trade Now), followed by Europe's sovereign-debt woes and the flash crash. Some feared a second financial collapse, until the European Union announced its $1 trillion rescue plan. Then concerns ran amok about a European slowdown that could derail China's economy.

With all this happening, Las Vegas Sands(LVS - commentary - Trade Now) should be sunk into the lows of the year. It's got heavy debt, major exposure to China through its Macau properties, and its U.S. operations are still incredibly weak .

Yet, LVS is up 72% year to date, compared with the S&P 500's 2% decline. It is also outperforming peers with a bigger presence in Macau, such as Wynn Resorts (WYNN -commentary - Trade Now), up 42% for the year, and MGM Mirage (MGM - commentary - Trade Now), up 27% for the year. Even against a smaller U.S. regional player such as Boyd Gaming (BYD - commentary - Trade Now), which has regained a healthy 31% of its stock price this year, LVS is still way ahead.

What's even more remarkable, these healthy gains didn't come in January, followed by a sharp retracement since Europe's troubles began. The stock's gains held up, and even increased through the past six weeks.

Consider Royal Carribbean (RCL - commentary - Trade Now), the ultimate consumer-discretionary purchase. During the "melt up" from January through April, the cruise-ship operator, along with many other retailers and discretionary names, benefited. Its stock gained more than 40%. Then came Goldman, Greece, the flash crash and China worries. Suddenly, investors recalled RCL's heavy debt burden -- $6 billion market capitalization and long-term debt exceeding $8 billion. If RCL were a country, it would be one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain). In fact, RCL has been battered these past six weeks, although it remains up 12% for the year, still good by S&P standards.

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Big Media: Big Yawn

The advertising market continues to be severely weak. Yet, the fact that we're not in freefall has caused some of the most beaten down and debt-laden companies to be bid up in the last 6 weeks.

Names such as Harley Davidson (HOG), Royal Carribbean (RCL), Cemex (CX) and Lamar Advertising (LAMR) are all up big since March 6th (65 - 167% vs. 25% for the S&P).

Comparatively speaking, Big Media's returns over that time period look more modest. Yes, CBS is up 70% since early March, but it's still trading at less than $6, giving it -- to put it in perspective -- only a little more than double the market cap of what it agreed to buy CNET for last year.

News Corp (NWS) and Viacom (VIA) are up 35% since early March but lag the S&P over the last 6 months. Disney's (DIS) return since March 6th is 2 points less than the S&P's. And Time Warner (TWX) stock price (not including the dividend from the spin-off of Time Warner Cable (TWC)) is only up +2% since the great Bull Run began 6 weeks ago. Memo to Jeff Bewkes: where did my rally go?

The truth is that, although Big Media has been pummeled since this bear market began, it was never really priced for extinction (except maybe CBS, which is why it has bounced back as much as it has) like some of the other consumer discretionary plays. This "rise from the dead" rally hasn't let them participate.

Big Media is left priced for a severe long-term painful future, which is probably accurate.
Therefore, it's a space I'm avoiding.

Position: None.

Originally published in RealMoney.com on 4/28/2009 11:30 AM EDT

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New Trend This Earnings Season: If You're Breathing, We'll Bid Up Your Shares

There's a trend emerging this earnings season -- especially for small- and mid-caps -- if you still have a pulse and can hold an earnings call, the market will take that as upside.

Several names pulled that off this morning. Fifth Third (FITB), the Midwest regional bank, saw shares trade up 8% this morning as losses were less than feared. International Game Technology (IGT), the casino gaming supplier we mentioned yesterday, saw its profit fall 44% in first quarter, but that was better than expected and the stock is up 6%. Royal Caribbean (RCL), the smaller of the two main cruise lines -- and a company I'm bearish on due to continued consumers pullback from discretionary spending but, as I said last week is one likely to go higher before it goes lower -- saw shares jump 16% this morning. Even as it lowered revenue numbers for the year, it was able to show it was keeping costs under control (important with its debt load).

What's the lesson here? It doesn't take much in this environment to spark a relief rally coming out of earnings. Keep that in mind, especially in the smaller names.

Originally published in RealMoney.com on 4/23/2009 10:24 AM EDT

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Five Stocks which will Drop, but Might still Snap Back Higher

A friend of mine said to me yesterday that he's never seen so many stocks that trade like options. They're "bifurcated specials" -- either they're going to double or triple from here or go to zero in fairly short order.

Even though many commentators, including Doug Kass in these pages, are warning against the market being short-term overbought, there are some stocks of companies with bad fundamentals facing terrible headwinds, which nevertheless keep going up in the short-term. Even though they look overbought, it's difficult to pull the trigger on shorting them.

Stocks like Harley-Davidson (HOG), Capital One (COF), Royal Carribbean (RCL), Carnival(CCL) and Liberty Global (LBTYA) have gone up 50 - 110% in the last 6 weeks. Yet they're down 50 - 65% in the last year. It's an overbought snap-back.

Eventually, the weak consumer environment that will persist will sour their results and impact the stocks. However, investors need to be mindful of betting on a downturn too soon -- which can be just as hazardous as betting on a recovery too soon.

Originally Published on RealMoney.com on 4/20/2009 8:20 AM EDT

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