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Rough Waters for Carnival

Good news! It’s time to stash your winter coats back in your attic. Tomorrow is officially the first day of spring.

And if you’ve read Chris’s forecast, you’ll know that it’s going to be an average spring storm-wise because the Gulf of Mexico is getting back to its typical warm temperatures.

That presents an opportunity for a company you’ll likely remember from previous dispatches: Carnival (NYSE: CCL), the leading cruise operator headquartered in Miami.

Carnival is a very seasonal stock. During the winter season, we jumped into the cruise operator to profit from the mass exodus of snowbirds looking for sunnier skies. We closed half of our position for a 100% return in just over a month and the second half for a 145% gain in less than two months.

Today, we are going to take the opposite side of that trade by riding another seasonal trend: Carnival’s spring sell-off…

Action to take: Buy to open the October 16, 2015, $46 put option (CCL151016P00046000) for less than $3.50. At last glance, it was trading at $3.20.

Historically, Carnival has sold off from March through June/July. Investors are simply reacting to Carnival’s expected seasonally weak quarter, which the company reports in July.

The numbers are weak because this is the quiet season for Carnival. About 50% of the company’s sales come from North America. During the spring, the area doesn’t tend to have severe weather, such as blizzards, spurring travelers to head south. Not to mention the kids are tied up in class for nearly the whole season, minus one measly week for spring break. Therefore, there are no unexpected travelers over the quarter.

That means there isn’t upward pressure on prices or robust demand, so investors don’t want to stick around to see the weak numbers. Hence, the spring sell-off.

You can see what I mean by taking a look the chart below:

Carnival’s Spring Sell-Offs

See larger image

Going back to 2010, you can see Carnival’s stock drop during the spring. The red arrows highlight our intended time frame: March to June/July.

As you’ll notice, we’re getting into the October options. Carnival shares routinely see a double bottom — hitting lows in June and then again in October. I’m recommending the October expiration in order to see how this sell-off plays out. I expect we will likely get out of the trade in late-June/early July, but we may hold the option longer if necessary. Our trade will give us plenty of time.

U.S. Economy Snowed Under

Now before I sign-off, I want to share a little more weather news that I recently discussed with Chris Orr.

It turns out that this was the coldest winter since the 1930s across parts of the Northeast, with some of the snowiest weather on record. And when February’s retail sales were released, we saw that impact on the economy. Here’s Chris:

The cold and snow kept many folks in their homes, with their wallets frozen shut, so retail sales dropped. The Department of Commerce says they fell 0.8% in January and 0.6% in February.

February’s numbers are big news because analysts had expected a 0.3%. increase. They had probably noted the slight increase last year in February’s retail sales after January’s decline. That month-over-month trend didn’t hold true this year because instead of being just very cold and snowy like it was in 2014, the snow and cold reached record levels.

There was one bright spot this year. Month-over-month building and garden supply sales increased 1.4% in January and 0.3% in February, presumably because of an increased demand for stuff like snowblowers.

That’s not a surprise to us. Our winter weather outlook called for a cold winter way back in September.

Interestingly, assuming weather was the most important reason sales fell, it appears we might be getting used to the colder weather. January and February’s total sales (excluding motor vehicles) rose 1.4% from 2014 to this year.

There is hope for retailers looking ahead. If last year is any indication, the sales numbers will bump up in April and May as weather becomes a non-factor.

Well, that’s it for this week. Keep an eye on your inbox in the coming weeks. I’ll be watching our portfolio and may have a trade alert for the Vail Resorts (NYSE: MTN) April $87.50 puts as we near expiration.

Until next time, good trading…

Jeff Opdyke
Editor, Precision Profits