Fading Jim Cramer's Bullish Take On The Cruise Line Sector
Jim Cramer pre-records his "Mad Money" broadcast and can't control news events that take place after his show airs on CNBC.
However, the after-hour traders that react to his comments may want to be careful after his recent musings on the cruise line sector.
On the September 30 "Mad Money" broadcast, Cramer made his bullish case for Carnival Corporation (NYSE: CCL), Royal Caribbean Cruises Ltd (NYSE: RCL) and Norwegian Cruise Lines Holdings Ltd (NASDAQ: NCLH). The crux of his thesis was that lower oil prices are a boon for the sector since it is a large portion of their expenses.
Going With Recent Earnings Trend
Two of the three issues (Carnival and Royal Caribbean) were coming off impressive numbers last quarter, and he expected the trend to continue. Improved occupancy rates and greater increased spending per customer along with cost-cutting measures improved margins and boosted EPS.
With both of these companies trading at low multiples and earnings potentially continuing to improve, there was considerable room on the upside for the sector. This was a bold call after all these issues were coming off impressive rallies and the Ebola threat was an unknown, which it still is.
All of the aforementioned issues rallied higher in the after-hours session on September 30, as Cramer groupies did not want to miss out on the move. Liquidity is limited in the after-hour sessions and a group of overzealous traders can make an impact on the share price of "hot issues."
Charts courtesy of Neovest
Timing Is Everything
Timing can be a critical factor when investing. The timing of Cramer's bullish rant for the cruise line sector could not have been worse.
On that same day, the U.S. Center for Disease Control confirmed at a 5:30 p.m. press conference that the first U.S. Ebola case had been diagnosed. With Cramer's pre-recorded show about to be aired at 6:00 p.m., he more than likely did not have that information. Nevertheless, the trading crowd that paid up for Cramer's picks did have that breaking news available to them but still let his call influence their purchases.
The following day, stocks in the cruise line sector opened flat to lower, then fell significantly. The selling pressure continued over several trading sessions, and these issues were destroyed: From September 30 to October 13, Carnival declined from $40.17 to $33.88, Royal Caribbean from $67.29 to $55.35 and Norwegian Cruise Lines from $35.17 to $31.97.
Cut Your Losses Short
Citing Ebola fears, Cramer declared on Monday's broadcast that cruise line stocks were going to be punished more than other travel stocks. Cramer defended his previous recommendation by saying how could he have seen Ebola coming, which is true, but could he have recanted his call much sooner than he did? As any investor can attest to, it is important to recognize when you were wrong, cut your losses short and move on.
After the cruise lines tanked and Cramer called for continued weakness in the sector, the sector has been going the other way.
In Tuesday's session, all three cruise line stocks are trading higher with Carnival and Royal Caribbean up about 2-3 percent, and Norwegian Cruise Lines nearly 1 percent. Whether the sector has bottomed remains to be seen.
Dennis Dick, co-host of Benzinga's #PreMarket Prep, witnessed the after-hours trading action in the sector. He said (beginning at the 14:42 mark of this video) that the sector could show sustained weakness off the Ebola scare and that the Cramer spike in the related stocks could be very be short-lived.
Tune in every morning, Monday-Friday, from 8-9:45 AM EST to hear Joel Elconin and Dennis Dick discuss what's moving the markets and why on Benzinga's #PreMarket Prep.
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