There could be an upside of over 80% for Royal Caribbean Cruises stock if its business recovers strongly post the Covid-19 pandemic. The stock trades at about $65 currently and has lost about 50% of its value year-to-date, as Covid-19 essentially brought the company’s business to a standstill… The shares of Twilio Inc (TWLO) are down 1.5% at $295.97 at last check, after the company disappointed with a lower-than-expected fourth-quarter forecast. The deal would broaden AMD’s business into chips for markets like 5G communications and automotive electronics. Rising Covid-19 infection levels around the world are compounding worries about the global economic outlook. Widespread investor pessimism is a contrarian indicator, writes Mark Hulbert.
BRAZIL – 2020/06/29: In this photo illustration the Royal Caribbean Cruises Ltd (RCCL) logo seen … [+] displayed on a smartphone. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)
There could be an upside of over 80% for Royal Caribbean Cruises (NYSE: RCL) stock if its business recovers strongly post the Covid-19 pandemic. The stock trades at about $65 currently and has lost about 50% of its value year-to-date, as Covid-19 essentially brought the company’s business to a standstill. The stock traded at about $118 per share in February, as the markets peaked pre-Covid, and is about 45% below that level presently. That said, the stock has more than doubled from lows seen in March 2020, driven by its progress in shoring up its liquidity and the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market, in general, recover to a large extent.
RCL stock has significantly underperformed the broader markets year-to-date, as investors remain cautious about the prospects of cruiseliners. The U.S. CDC has indicated that cruise passengers are at increased risk of the person-to-person spread of infectious diseases, recommending that travelers defer all cruise travel. Cruiseliners from the U.S. have not sailed for the last seven months or so, and RCL is unlikely to resume the U.S. cruises until at least December. However, as the pandemic subsides, the company is likely to see demand rebound back fairly quickly. There are some indicators that customers could take to cruising fairly quickly once the health crisis subsides. For instance, in August, the company indicated that it was seeing a surge in bookings for the second half of 2021, despite very limited marketing.
Our conclusion on the company’s upside potential is based on our detailed analysis comparing Royal Caribbean’s stock performance during the current crisis with that during the 2008 recession an interactive dashboard analysis.
2020 Coronavirus Crisis
Timeline of 2007-08 Crisis
Royal Caribbean vs S&P 500 Performance Over 2007-08 Financial Crisis
RCL stock declined from levels of around $40 in October 2007 (the pre-crisis peak) to roughly $6 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 85% of its value from its approximate pre-crisis peak. This marked a significantly higher drop than the broader S&P, which fell by about 51%. However, RCL recovered strongly post the 2008 crisis to about $26 by the end of 2009 rising by 320% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
RCL Fundamentals In Recent Years Looked Good, But Current Situation Is Very Challenging
Royal Caribbean’s revenues rose from about $8.5 billion in 2016 to about $11 billion in 2019, as demand for cruises rose. The company’s earnings also grew sharply over the period, rising from around $6 per share to about $9 per share. However, the picture has changed drastically for the company over 2020. Over Q2 2020, Royal Caribbean’s Revenue saw an unprecedented 93% decline compared to the same period a year ago. Full-year sales for 2020 are likely to fall by over 70% and it’s very likely that it could take over a year for Revenues to return to pre-Covid levels, assuming that there are no major changes in consumer behavior post the pandemic.
Does RCL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Royal Caribbean’s total debt has increased from $8.1 billion in 2016 to almost $19 billion at the end of Q2 2020, while its total cash increased from about $130 million to $4.2 billion over the same period, as the company raised funding to tide over the crisis. Further in October, RCL indicated that it would raise another $1 billion in new capital, part of which would come via senior convertible notes. While the company’s cash flows from operations grew from $2.5 billion in 2016 to $3.7 billion in 2019, with operations largely suspended, the company is currently burning through an excess of $250 million a month. While the company’s cash cushion appears relatively comfortable at present, if it doesn’t set sailing by next Summer with occupancy levels picking up, things could get tough.
Phases of Covid-19 crisis:
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery of over 80% once the pandemic ends via the deployment of a safe and effective vaccine or via herd immunity, and customers are more confident about taking cruises. This would make a full recovery to levels of close to $120 that Royal Caribbean stock was at in February before the coronavirus outbreak gained global momentum.
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Twilio Stock Slips Despite Analyst Praise
The shares of Twilio Inc (TWLO) are down 1.5% at $295.97 at last check, after the company disappointed with a lower-than-expected fourth-quarter forecast. To follow, no fewer than six analysts raised their price targets, with the highest from RBC all the way to $400, who noted that the company’s fourth-quarter guidance looks “highly conservative.”
With the 20-day moving average moving in as potential pressure, TWLO is still up an impressive 202% year-to-date. Faltering further from its recent rally between mid-September and mid-October, the security is now eyeing its second-straight week of losses.
Analysts are still confident on TWLO, with 18 out of the 21 in coverage at a “buy” or better rating coming into today. Meanwhile, the 12-month consensus price target of $353.54 is still a 19.6% premium to current levels.
Options traders are chiming in after the report as well, with 27,000 calls and 17,000 puts across the tape so far – double what is typically seen at this point. Most popular is the weekly 10/30 300-strike call, where new positions are being opened.
Despite the high volume, the sentiment seems fairly standard for TWLO recently, with double the amount of calls bought for every put in the last 10 days at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio sits in the 61st percentile of its annual range, meaning calls are being picked up at a slightly higher rate.
Furthermore, the equity’s Schaeffer’s Volatility Scorecard (SVS) ranks at a 97 out of 100, meaning Twilio stock has tended to exceed volatility expectations during the past year. This is a good thing for premium buyers, as it indicates that the stock has consistently delivered bigger returns than its options implied volatility (IV) levels have predicted.
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Author: Schaeffer’s Investment Research
AMD Agrees to Buy Xilinx for $35 Billion in Stock
Technology|AMD Agrees to Buy Xilinx for $35 Billion in Stock
The deal would broaden AMD’s business into chips for markets like 5G communications and automotive electronics.
SAN FRANCISCO — Advanced Micro Devices agreed to pay $35 billion in stock for Xilinx, a deal aimed at reshaping one of the computer chip industry’s pioneers.
AMD, known mainly as Intel’s longtime rival in microprocessors that power most computers, plans to use the acquisition to broaden its business into chips for markets like 5G wireless communications and automotive electronics. The transaction could also help AMD grab a bigger share of component sales for data centers and counter a prominent rival, Nvidia, which is also bulking up.
The all-stock deal, announced on Tuesday along with AMD’s third-quarter financial results, would be close to the most valuable acquisition in the chip industry’s history. Those bragging rights are currently held by Nvidia for its proposed $40 billion deal for the British chip designer Arm, which was announced last month.
Chip makers have experienced several consolidation waves, driven by factors such as duplicate product lines and cost-cutting strategies. But AMD, which is enjoying some of the most robust sales in its 51-year history, expects Xilinx to expand its business while increasing profits.
Lisa Su, AMD’s chief executive, said in prepared remarks that Xilinx would help establish her company as “the industry’s high-performance computing leader and partner of choice for the largest and most important technology companies in the world.”
That sort of reputation has long eluded AMD, which for decades was seen as an Intel follower that mainly won sales with lower prices. But the company has lately grabbed a lead over Intel in some key measures of computing performance, while its larger rival has suffered technological and financial stumbles.
On Thursday, Intel reported a 29 percent decline in quarterly profits, which caused its stock to fall more than 10 percent. AMD, by contrast, reported on Tuesday that its quarterly profit had risen 148 percent.
AMD’s stock, which was trading five years ago at about $2 a share, has risen nearly 80 percent this year and closed Tuesday at $78.88, down 4 percent on the day. AMD’s market value stands now at nearly $100 billion.
Xilinx, founded in 1984, is the biggest maker of a class of chips that can be reconfigured for a variety of specialized tasks after they leave the factory. Such field programmable gate arrays, as they are called, have long been particularly popular in telecommunications applications, such as cellular base stations now being upgraded for the latest 5G technology.
Xilinx has also been one of the biggest chip companies hurt by trade limits on China’s Huawei, a major maker of networking equipment and one of Xilinx’s biggest customers. The company last week said that revenue had declined 8 percent.
But Xilinx’s gross margins are much higher than AMD’s, and the company continues to generate considerable cash. Xilinx’s market value stands at about $28 billion, reflecting a sharp jump after The Wall Street Journal reported deal talks between the companies on Oct. 8.
AMD’s interest in Xilinx emulates a path taken by Intel. In 2015, Intel entered the same business by paying $16.7 billion for Altera, Xilinx’s main competitor. That deal, inspired partly by the prospect of producing Altera chips in Intel factories, has failed to generate big returns as Intel’s manufacturing processes have fallen behind rivals.
AMD relies heavily on external manufacturing partners, as does Xilinx — particularly Taiwan Semiconductor Manufacturing Company, which has grabbed a lead in packing smaller transistors on each chip. Both companies have also pushed new technologies for creating new products from packaging multiple chips together.
The proposed transaction dwarfs AMD’s most significant past acquisition, a $5.4 billion deal for ATI Technologies in 2006 that took the company into competition with Nvidia for chips that render images in video games. That graphics technology would make AMD a major supplier of chips for video game consoles. But it also saddled AMD with a heavy debt load that took more than a decade to erase.
AMD reported about $1.7 billion in cash at the end of September.
The companies said the deal was expected to be completed by the end of 2021. Victor Peng, Xilinx’s chief executive, will continue to lead the operation after the close of the deal, the companies said.
Author: Don Clark
Dow, S&P 500 Slide After Big Selloff
U.S. stocks wobbled Tuesday, attempting to stabilize after worries about the coronavirus pandemic sent markets tumbling to start the week.
Rising Covid-19 infection levels around the world are compounding worries about the global economic outlook. The seven-day average of new cases in the U.S. reached a record Monday, while a number of countries in Europe, including Italy, Spain and Russia, tightened restrictions on activity to try to curb the spread of the virus.
One factor that has helped stocks bounce back from selloffs in the past: evidence that parts of the economy have started to recover from disruptions and shutdowns related to the pandemic.
Orders for long-lasting factory goods increased for the fifth consecutive month in September, Commerce Department data showed Tuesday. Orders rose 1.9% in September from August.
The Dow Jones Industrial Average fell 222.19 points, or 0.8%, to 27463, down four of the past five trading days. The blue chips are down 3.8% for 2020. The S&P 500 lost 10.29 points, or 0.3%, to 3390.68. The Nasdaq Composite climbed 72.41 points, or 0.6%, to 11431.35.
Author: Mischa Frankl-Duval and Amber Burton
Most investors now expect the U.S. stock market to crash like it did in October 1987 — why that’s good news
Individual investors have never been more worried about a U.S. stock market crash. That’s great news. This counterintuitive reaction is because investor sentiment is a contrarian indicator. So it would be more worrying if investors thought there was a low probability of a crash.
This upbeat news will be particularly welcome after the Dow Jones Industrial Average plunged 650 points, or 2.3% on Oct. 26 — the worst one-day decline since early September.
Historical data on investor beliefs about crash probabilities comes from Yale University finance professor (and Nobel laureate) Robert Shiller. For more than two decades he and colleagues at Yale have been surveying investor sentiment by asking the following question:
“What do you think is the probability of a catastrophic stock market crash in the U. S., like that of October 28, 1929 or October 19, 1987, in the next six months, including the case that a crash occurred in the other countries and spreads to the U. S.? (An answer of 0% means that it cannot happen, an answer of 100% means it is sure to happen.)”
The chart below plots the results, referred to by Shiller and his colleagues as the “U.S. Crash Confidence Index.” It shows the percentage of individual investors who think the probability of a crash is below 10%. Note carefully that lower numbers in the chart mean that more investors believe a crash to be likely.
Now is one of those times. In August, the U.S. Crash Confidence Index (CCI) fell to a record low — at 13%, meaning that 87% of respondents believed the probability of a crash to be greater than 10%. In September, the reading was a still-low 15%.
A close examination of this chart also shows why a contrarian interpretation of the CCI may be warranted. Notice that the other occasion on which it got as low as it is today was the spring of 2009. That coincided with the bottom of the financial crisis-induced bear market —a great time to invest in the stock market.
Crash confidence index readings:
Fear of crash is…
Average S&P 500 total real return over subsequent 12 months
Average S&P 500 total real return over subsequent 24 months
Lowest 10% of historical readings
Highest 10% of historical readings
The strongest results are at the 24-month horizon, where the difference between the returns shown in the table is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. The difference in the table at the 12-month horizon is of marginal statistical significance.
My analysis of the CCI is not the only way to interpret it. In a recent opinion article in the New York Times, Shiller pointed out a big difference between now and the situation that prevailed in the spring of 2009: then the stock market was far less overvalued than it is today, as judged by the Cyclically-Adjusted Price Earnings (CAPE) ratio — if not outright undervalued. The market’s strong performance after the spring of 2009 might therefore have been a reaction to the market’s valuation rather than a contrarian reaction to the widespread crash anxiety.
If so, then contrarians should think twice before concluding that today’s widespread crash anxiety is equally bullish. Furthermore, Shiller added, there is a behavioral basis for concern: anxiety increases the chances “that a negative, self-fulfilling prophecy will flourish.”
I nevertheless cling to my analysis, since even after eliminating 2009 from the sample the contrarian interpretation continues to enjoy statistical support. An email to Shiller requesting comment was not immediately answered.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com.
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Author: Mark Hulbert