The COVID-19 pandemic is having an effect on so many of the stocks trading these days, some more than others. For instance, the stocks for many of the biotech companies that are pursuing a vaccine for the coronavirus are having an amazing year. Novavax stock is up almost 4,000% and a tiny biotech with an oral vaccine candidate, Vaxart, is up almost 3,000%.
Many other stocks, however, have been slammed since COVID-19 hit. Think of all the restaurants that have been closed or are operating at a reduced capacity, the airline flights that have been grounded, the cruise ships that are stuck in port, or the hotels that remain nearly empty. Even some healthcare stocks have taken a hit related to the pandemic. After all, many biotech companies are not pursuing a COVID-19 vaccine. And some drug companies have been forced to delay clinical trials on non-coronavirus drug candidates because of the coronavirus.
While the market remains negative on certain sectors and individual stocks, this represents a potentially great buying opportunity for the contrarians out there. We know why the stock prices are down and we also know that COVID-19 is very likely a temporary disruption, not a permanent one. Thus, if the companies have enough cash to withstand this health emergency, business at these companies should eventually return to normal and the stocks should quickly bounce back.
On the basis of that contrarian outlook, here are two stocks that show a lot of potential.
Image source: Getty Images.
1. Park Hotels & Resorts: Signs are good for a recovery
Shares of Park Hotels & Resorts (PK 2.32%) are down over 65% in 2020. The company's market cap was over $6 billion at the beginning of the year; it's now dropped to a little over $2 billion. This sell-off is unsurprising as many hotels have been closed or operating at a greatly reduced capacity since COVID-19 hit. Revenue at Park Hotels was down 95% this past quarter.
Right now it's a cash game for Park Hotels. Does the company have enough money to withstand the shutdown? In its conference call last week, management reported that Park Hotels has $1.6 billion of liquidity available. And it has reduced its burn rate to $65 million a month. If conditions don't change, that's two years' worth of operating cash available.
I'm bullish on the vaccine stocks, and I believe we'll have multiple COVID-19 vaccines approved by the FDA by early 2021. These developments will send airline, restaurant, and hotel stocks through the roof. Indeed, Park Hotels stock price has already more than doubled off its low of $4 a share back in mid-March.
Intrepid long-term investors should ignore all the bad news hitting this hotel chain in 2020. Park Hotels & Resorts has plenty of cash to weather this financial storm. And a return to normalcy might mean a tripling for the stock as it recovers to prior levels. Contrarians should profit nicely here.
2. Royal Caribbean: Limited additional downside but plenty of potential upside
Over the last two decades, we've had three major stock market crashes, in 2000, 2008, and 2020. When you look at the chart of Royal Caribbean Cruises (RCL 3.55%) over that time span, you see an interesting phenomenon. These macro events always hit this stock particularly hard.
Data source: YCharts
The COVID-19-sparked stock market crash is the scariest time in Royal Caribbean's history. A pandemic is particularly brutal on cruise ship stocks. That's because there is plenty of evidence that it's awful to be on a cruise ship carrying passengers who have COVID-19. Passengers have nowhere to go. They want to be off the ship but are kept from leaving. There were horror stories in the media of cruise ships that were unable to let their passengers disembark.
So it's not surprising that when COVID-19 hit, the stock price of Royal Caribbean fell hard and fast. On Jan. 2, shares were trading at $134 a share. By March 18, the price had dropped to under $20. People who bought at the high were seeing losses of 85%.
For contrarians, these sharp losses are just a reminder that our losses are always limited. No matter how stupid our investment is, the most we can lose is 100%. The upside, however, is potentially unlimited. Consider the brave investor who bought during the dark days of March, at $20 a share. On Friday the stock closed at $60 a share. So they've already tripled their money in the midst of an ongoing coronavirus pandemic when all the cruise lines are still effectively shut down. And if the COVID-19 vaccines work and the fears dissipate? It's entirely possible the stock price recovers to previous levels. And that brave investor will have a six-bagger if and when the stock hits $120 a share.
Downside? Limited. Upside? Plenty. So go ahead and be an optimist in the stock market, because the math is with you on this one.
Right now, Royal Caribbean investors need to think about cash and burn rates. In its most recent conference call, Royal Caribbean announced that it had $4.1 billion of liquidity. Management estimates its cash burn at $250 million to $290 million per month. That means the company has enough cash to survive 12 to 14 more months of being unable to sail. Right now, the company has volunteered to remain shutdown to cruise embarkations through Oct. 31.
Does Royal Caribbean very much need a COVID-19 vaccine approved by the FDA? It absolutely does, and as soon as possible. And the federal government and others are spending billions to make it happen. Small biotechs are already receiving massive checks now to line up manufacturing facilities for when a vaccine is ready for production. The goal of the U.S. government's Operation Warp Speed is to have 300 million doses of a vaccine available in the U.S. by January. Multiple biotech and pharmaceutical companies are in a mad dash to have a vaccine ready by then. And when these companies succeed, the hotels will reopen, and the cruise lines will sail again.
