Why Disney, Royal Caribbean, and Carnival Are Up

In this episode of Market Foolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest financial news. They look at biotech and retail companies and answer questions related to the retail apocalypse, stock diversification, and much more.

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This video was recorded on May 18, 2020.

Chris Hill: It's Monday, May 18. Welcome to Market Foolery. I'm Chris Hill. Joining me today: the one and only, Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: We're going to talk some retail, we are going to dip into the Fool mailbag, but we are going to start with the stock of the day, and that is Moderna (MRNA 0.59%). Shares of Moderna are up more than 20% after the biotech company announced positive interim data on a Phase I study of its coronavirus vaccine. These are human trials, so that's encouraging. I should point out, not a lot of humans. This is not one of those tests [laughs] that's been done on thousands or even tens of thousands of people. But still, this is encouraging, both, for Moderna and, I think, for the overall market.

Barker: Yeah. Positive results from the phase I trial, which are largely very positive results, let's put it that way; the market certainly is putting it that way. And so, phase I trial, you're dealing with the safety, primarily, of what you're going to be studying, and you do that in the smallest group, tens, it was 45 in this case.

Then in phase II, you move that trial to hundreds, and in phase III, to thousands. So 45 people on various different levels of the test vaccine dose all showed positive antibodies. They were good antibodies. And that's good news, they can move forward. And they hope to be in phase III or plan to be in phase III in July. And then, if everything goes well from here to there and in phase III, have a vaccine sometime in 2021.

Hill: It really is amazing to see the reaction in the market, because again, it's not just Moderna, with the stock up 20%. But you look at things like, shares of Disney (DIS -0.57%) are up 8% this morning. Royal Caribbean, Carnival (CCL 0.32%) Cruise Line, those stocks are up anywhere from 10% to 15%.

And my assumption is [laughs] that at least part of what's going on with just those three companies is short-sellers saying, "Oh, well, if a vaccine is coming, then maybe I don't want to be short of these companies."

Barker: Could be. Certainly, as stocks move up quickly, some short-sellers' positions are going to be eliminated either by program or by choice.

Regarding the whole market, of course, there was a little bit of a tailwind going into the news. That is, Powell spoke and was shown on 60 Minutes last night, and that was well received, as he indicated that the Federal Reserve had lots of ammunition left to help. And so, even before this announcement came out, the market was indicating a higher open by about 1%, and this certainly ramped that up.

Hill: Yeah, J. Powell on 60 Minutes definitely viewed more favorably by the market than J. Powell who spoke, what was it, last Wednesday, last Tuesday or Wednesday, the comments that he made that were just, sort of, like, "Well, I don't know." I mean, last Wednesday, it was basically J. Powell saying, "Yeah, this could be bad. This could be, [laughs] sort of rough." And the one we saw last night on 60 Minutes was much more positive.

Barker: Right. And essentially, what he had said is the economy is not likely to fully recover until there's a vaccine, and that really shouldn't be news. If people want to react to that like it's some new, alarming thing, perhaps they did, because there are many overreactions up and down, both as we move through this episode and the market in general. But now, you've got the beginnings of an answer to that. OK, well, when will there be a vaccine? And Moderna is giving some support.

There's a long way to go between here and a vaccine, and a vaccine that's available on the market, but an important hurdle has been cleared. And with as good a set of data as you could hope to have this early in the process.

Hill: Let's move on to retail. It is now official: JCPenney (JCPN.Q) has filed for Chapter 11 bankruptcy protection. And the plan is to split JCPenney into two separate companies, both publicly traded; one of them will be the retail business; one of them will be a real estate investment trust. Is it rude for me to say out loud that I'm not interested in either of these? Because a lot of times when a public company splits in two, there's one part of the business that is visibly more attractive than the other. I find neither of these attractive. What about you?

Barker: Well, I suppose it would be rude if I were JCPenney to tell that to me, but I'm not, so go ahead, express your opinion. [laughs]

Hill: I think I just did.

Barker: Okay. Well, I found nothing rude in it. And I agree, I think that this is a mechanism that is not likely to change a whole lot of investors' opinions. Now, they may be more interested in the REIT, as it is going to have more tangible value, I think, but this is kind of their attempt to sort of, if you remember back to the financial crisis, splitting banks into the good bank and the bad bank, and put all the bad stuff in one place, and let's call, you know, all the good stuff in the good bank, and that's more or less what this is.

And I don't think that the good real estate in this case is of especially attractive value. There's going to be plenty of competing available real estate.

Now, they're shutting, what was it, about 29% of their locations. These are sort of the lesser-performing and/or smaller ones. So really, they expect to have about 82%, I think, of their sales remaining after this. But that 82% is still in a category that is dwindling over time. So until they can put some really interesting numbers on what the real estate might amount to, I wouldn't advise anybody to rush into it.

Hill: Our email address is [email protected]. Question from John Pachola, a timely question, because it leads right into the point you just made. "What are your thoughts on some of the discount retailers -- TJX Companies, Ross Stores, Burlington Stores? With the retail apocalypse upon us, these companies should be able to get their hands on some attractive inventory from the weaker retailers in a cash crunch or facing bankruptcy. These were all good operators before COVID-19, and I would love your thoughts on their long-term outlook as states begin to reopen. Thank you, and long live the bulls."

Indeed, John, so thank you for that. Boy! If you owned Burlington Stores for the past decade, congratulations, because that is one of the best-performing stocks of the last 10 years. And I think John is thinking about this the right way in terms of whether it's businesses that are in a cash crunch that are closing locations or, in the case of JCPenney, just outright declaring bankruptcy. That is an opportunity for the Burlington Stores of the world.

Barker: Yes. They are absolutely going to have a crack at a lot of inventory that companies need to move. They've had probably inventory, in some cases, in stores that are closed. And that they need to move as the seasons have changed. And just you've got places like J. Crew, which are going to be liquidating a plenty of inventory, and how many others, I could barely count, are likely to be in the same position.

And of the company, certainly Burlington has done an outstanding job, TJX Companies as well. And I would want for a long-term play, I like those companies, I like those managements, I'd give consideration to how many locations are in malls as opposed to other freestanding sites? As I think the mall weighting is one to avoid if you can. And how developed their online presence is. Because at times like this, that's keeping retailers afloat who have a better online operation or who are ramping that up now. If they are too late to that game, I wouldn't want to join in.

Hill: Look, I think we both think we're going to see more retail bankruptcies in 2020 and in 2021. Do you think we're also going to see more spinouts, where retailers that have multiple brands under their portfolio, under the parent company, look to sort of spin some of them out? Because I'm thinking about things like, you know, companies like Walmart and Target, that if they want to -- I mean, it's not just the discount retailers that can be opportunistic in these situations. It can also be major retailers like Walmart and Target and even Amazon, if they want to be, to say, yeah, we're interested in sort of picking off this one brand out of your portfolio.

Barker: I think there's going to be a lot of creative maneuvering. And it's easier said than done. You can look at Limited Brands [L Brands] and what Victoria's Secret is going through in the attempts to try to spin that out and the difficulties with that. And I think there are going to be a lot of things up for sale. And we're going to see a lot of opportunities, there's going to be a lot of things that appear to be deep value as they're going to be in, sort of, greater dislocation. And some smart people are going to pick up things very cheap, but you know, long term, most of the apparel retailers seem to me, outside of these successful discount retailers that we've mentioned, to have a lot of competition and a lot of problems.

Hill: One more email, this time from Brian Chen in Taiwan. He writes, "Right now I'm investing in a dozen stocks, but I also invest some of my money buying Vanguard's S&P 500 Index Fund. Does this sound like a logical thing to do? I'm worried about not diversifying my portfolio. Would you suggest either let go of my index fund shares or invest all of my money in the index fund?"

I feel like Brian's on the right path here. I mean, you know, a lot of times, we tell people, a great first step is just go and get some instant diversification with an S&P 500 index.

Barker: Yeah, if you've got the S&P 500 index or to be even more diversified, for instance, the Vanguard Total Stock Market Index, which goes beyond the, essentially 500 biggest companies in the market, which are in the S&P 500, to everything else, you're pretty well diversified.

So the question here is, if you've got, say, a dozen individual positions plus the S&P 500, I don't know what the percentage in each of those is, but that's probably pretty good diversification if those 12 companies are not the lion's share of the portfolio and they aren't, sort of, all in a specific sector of the market. If those are 12 tech companies that do things that all, sort of, move together and largely movig up in the hardest part of the market lately, but if those are the stocks that you have individually chosen, then you may not be as diversified as you think.

That said, if that's 15% of your portfolio in those 12 stocks and 85% in the S&P 500, you're pretty well diversified. So I think he's asking the right questions. And it goes to, are the individual stocks adding? Those may be 12 stocks that are outside of the S&P 500, in which case, they're adding diversification to the S&P 500-weighted investment portfolio.

Hill: Hopefully, they're not 12 oil stocks. Just to take the other...

Barker: ...or, I mean, if the 12 oil stocks were bought, like, this morning or the end of the day Friday, not quite as bad. [laughs] They're doing a little bit better today, of course, as oil prices are up, but yes, I do hope those 12 stocks are not all oil stocks.

Hill: Bill Barker, thanks for being here.

Barker: Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.