Royal Caribbean: Cruise to Cuba?

09/28/2015 8:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

It’s going to take more than just another couple of good days to turn the market’s trends back up—right now, all of the major indexes (and the vast majority of stocks) are still buried beneath resistance and are trading below key moving averages—says Mike Cintolo, editor of Cabot Top Ten Trader.

Thus, we’re sticking with our defensive stance, the onus is clearly on the bulls to re-take control.

Meanwhile, we been looking for a batch of potential stock market leaders. Our Top Pick is Royal Caribbean (RCL), a big-cap leisure stock that has a strong chart and big earnings estimates.

Royal Caribbean is riding a couple of beneficial trends and investors are taking notice.

The first trend is very cheap energy prices that are reducing fuel costs and pushing after-tax profit margins higher; the 9.0% margin in Q2 was the highest in years for a non-third quarter (fall always boasts bigger numbers than the other three quarters).

The second trend is the increasing popularity of cruising among Chinese vacationers. Investors are also looking forward to the opening up of Cuban destinations as a possible catalyst for greater passenger traffic.

And the third trend is the increasing popularity of the super-premium cruise segment, a group of cruisers that Royal Caribbean is targeting with its Royal Suite Class accommodations and services.

The company is expanding its terminal facilities in Miami at a cost of $100 million, a move that will facilitate cruising in the Caribbean and the anticipated service to Cuba.

The company also just announced a 25% increase in its dividend, bringing it up to a 1.6% annual yield. Throw in some beefy earnings estimates (+35% this year and +28% next) and there’s a lot to like.

RCL began its current rally in the middle of 2013 and has soared from 30 to the low $90s since then.

There have been a few stumbles along the way, but corrections have typically been followed by renewed buying within a few weeks.

RCL reached $86 in January 2015, then was hit by selling that pulled it back to $66 on May 6.

But since then, RCL has been on a roll. With a P/E of 26, the stock isn’t even especially expensive. If you like the story, try to get in on weakness.

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