How Can Royal Caribbean Investors Navigate Market Volatility?

by Trefis Team
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The S&P 500 registered a sharp 3.5% drop on Wednesday (28 Oct), its biggest single day drop since June 2020. Many stocks fell, but we are more interested in Royal Caribbean Cruises (NYSE:RCL), and its competitors Norwegian Cruise Line Holdings (NYSE:NCLH), and Carnival Corp (NYSE:CCL). Why? Simply because the cruise industry is among the worst affected by Covid-19, and market volatility at this point increases investor risk significantly. Uncertainty concerning U.S. elections, resurgence of Covid-19 infections, and the stimulus package impasse mean that November is likely to be a tricky month for investors. So how can you best navigate this period if you are an existing or potential investor of cruise line stocks? Trefis’ AI engine can be a powerful tool to assist. Given the recent fluctuations, it can help you understand how cruise line stocks might behave in the near term. As an example, Royal Caribbean is likely to go further down before it gains any upward momentum, and this might happen over the course of the next 1-2 months. Curious how it works? See the engine’s interpretation for Royal Caribbean cruises below, and try it out yourself for other cruise line stocks.

Royal Caribbean Cruises – It Might Get Worse Before It Gets Better

The first step is to understand how Royal Caribbean’s stock has moved recently. As it turns out, the stock has fallen nearly -13% in the last 5 trading days and about -18% in the last one month. Second step is to figure out how the stock typically behaves following such sharp moves. Our dashboard highlights Royal Caribbean’s chances of rising or falling, and can help you understand near-term return probabilities for different levels of movements.

So what does it tell us? We outline two cases with different amounts of information considered.

First Case: If you take only the last week’s movement into account, the chances of the stock moving up or down over the next few months are outlined below. The essence -> While the stock is more likely to fall in the next 1 month, it is more likely to rebound in 3 months from now.

5% rebound 5% fall Relative Chances – Rebound vs Fall
Next 1 month 38% chances 50% chances 0.8
Next 3 months 51% chances 39% chances 1.3

 

10% rebound 10% fall Relative Chances – Rebound vs Fall
Next 1 month 30% chances 40% chances 0.8
Next 3 months 48% chances 33% chances 1.5

Second Case: However, if you take last month’s full movement into account, the chances of the stock moving up or down over the next few months change slightly. The essence -> Stock is more likely to rise than fall irrespective of the time frame. 

5% rebound 5% fall Relative Chances – Rebound vs Fall
Next 1 month 43% chances 38% chances 1.1
Next 3 months 48% chances 41% chances 1.2

 

10% rebound 10% fall Relative Chances – Rebound vs Fall
Next 1 month 34% chances 27% chances 1.3
Next 3 months 45% chances 35% chances 1.3

The conundrum: While in both cases the prediction for the 3-month time frame is similar, it differs for the 1-month time frame. Does it make sense? It actually does, because the first prediction relies on just last week’s movement while the second relies on the full last 1 month’s movement. Predictive ability changes with the amount of information considered. So which one should you choose?

One way to look at this is that to make a decision for a longer time frame, one should consider more amount of information. You can’t predict 3 month movement based on just the past 1 day’s data. So choose the second case if you are looking at this for 3 months or beyond. For 1 month, we might be better off considering the first case because the recent movement is significant and sharp, and is likely to impact near term market sentiment.

What About Carnival And Norwegian? 

Are Carnival and Norwegian likely to behave in a similar way? Not necessarily. While the business and demand factors are the same, each stock’s volatility can be different. Try it out yourself with our interactive dashboards powered by our AI engine, outlining chances of rising and falling for Carnival Corp and how Norwegian Cruise Line Holdings stock might behave going forward.

Cruise line stocks, while a good long-term bet, can be risky in the near-term as we have seen from recent fluctuations. But there are good investment alternatives in the market. For example, here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

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