Carnival Corp (CCL) produced positive free cash flow last quarter, and analysts have significantly higher price targets for CCL stock. Given its recent tumble, CCL looks attractive here, especially for cash-secured short-put plays.
CCL is at $17.26 in midday trading on Tuesday, April 8, well off its Jan. 30 high of $28.49 per share. It may have reached a near-term trough of $16.43 yesterday. That makes it an opportune time for value investors to buy the dip.
Analyst Price Targets
Moreover, analysts' price targets are still well over the present stock price. For example, Yahoo! Finance reports that the average price target of 29 analysts is $28.34 per share. Similarly, Barchart's survey has a mean price target of $28.62.
The average of these two surveys($28.48) implies an upside of 65% in CCL if it were to hit these price targets.
In addition, AnaChart.com, which tracks recent analyst recommendations, shows that 19 analysts have an average price target of $22.39. That is still $5.17 higher than today's price, or +29.7% higher.
Moreover, the table below shows that the top 5 analysts, as ranked by AnaChart's Performance Score metric, have an average price target of $26.60 per share. That implies an upside of over +54.4% in CCL stock.
This Performance Score is a statistical index measuring how often and how closely CCL stock has hit these analysts' price targets. For example, Christopher Stathoulopoulos of Susquehanna has been right 100% of the time and his Performance index score is 10.34, much higher than other analysts. His present price target is $22.00 for CCL.
That implies over +27.7% upside in the stock.
However, there is no way to know when this will occur. It could take a year or longer. One way to play this, setting a lower buy-in target and still getting paid, is sell short cash-secured put options in out-of-the-money (OTM) strike prices.
Shorting Cash-Secured Puts
I discussed this in my last Barchart article on March 23, where I discussed selling short the April 25 expiry puts at the $20.00 strike price. At the time, the premium obtained doing a cash-secured short-put play was $0.78, or 3.90% (i.e., $0.78/$20.00).
Note that at the time, CCL stock was $20.94, so this play was 4.45% below the trading price (i.e., out-of-the-money or OTM). Since CCL is below that price now the investor could potentially end up with an unrealized capital loss if the puts are assigned.
For example, the breakeven point (i.e., $20.00-$0.78, or $19.22) would still cause an unrealized loss of $2.00, or -10.4% (i.e., $2.00/$19.22-1 = -0.104). Moreover, the $20.00 puts today are trading for $3.05 on the ask side.
(New investors can short the OTM $15.50 strike price puts expiring April 25 and immediately make 56 cents, or a yield of 2.19%).
Not to worry. If an investor feels that CCL won't rise above $20.00 by April 25, they can roll this trade over. For example, look at the June 20 expiry period. It shows that the $20.00 puts have a $3.50 premium at the midpoint.
This means that an investor who shorts the $20.00 puts expiring June 20, (even though they are in-the-money), will make $3.50, with a breakeven point of $16.50 (i.e., $20-$3.50).
That way, the investor can buy to open the April 25 puts, paying $3.05 to cover the prior cash-secured put play. So here is how the math works:
$0.78 Sell to Open income - $3.05 Buy to Close = - $2.27 net loss (April 25 short put play)
$3.50 Sell to Open income - $2.27 prior net loss = $1.23 net credit (June 20 short put play).
This results in a net breakeven of $20-$1.23, or $18.77. That is still in-the-money (ITM), but this assumes that CCL will stay below $20.00 by June 20. Given its significantly higher price target, that might not happen. Moreover, this is a better break-even than the $19.22 point shown above with the April 25 short-put play from last month.
This shows that investors have alternatives here, given that CCL stock looks cheap. Moreover, new investors in these April and June expiry short-put plays can make very high yields.
The bottom line is that CCL stock looks cheap here, and shorting out-of-the-money (OTM) puts is a good way to set a lower buy-in target price.
