Pick the Right Mispriced Stock, Cruise Ahead

What defines a mispriced stock? They are shares that are clearly out of sync with the true value of the company. Stocks can be mispriced to the upside, overpriced, or get drastically cheaper than they deserve to be. How can you tell? It's all in the numbers. Check out the six year growth table for Norwegian Cruise Line Holdings for an example of a bargain-priced stock. All four of the firm's major business metrics have risen sharply since 2013, when the stock came public. Earnings per share, the most noteworthy and watched growth indicator, is expected to come in almost 1,000% higher this year than it did six years ago. Cash flow per share surged by greater than 400%. NCLH's share price, though, as of July 28, was only about 58% above where it sat on the same day in 2013. Shares that fail to reflect huge embedded value creation are primed to pop higher as a catch-up move arbitrages away the discrepancy. Let's review NCLH's history to see what the shares should really be selling for. Proven growth stocks typically command higher price-to-earnings than slow growth, or non-growth stocks. At NCLH's 2014 low, people ponied up 18-times forward estimates to buy shares. At 2015's high point, traders were paying over 34-times trailing earnings to own Norwegian Cruise Lines. The stock rallied strongly between those two time slots. It also ran up sharply from the stock's 2016 bottom, at 12.3-times that year's earnings per share. Just 10-months later, NCLH fetched more than 18-times earnings and was back to north of $61. 2018's Christmas Eve capitulation saw NCLH dip to under $40. It was briefly available for just 9.3-times trailing earnings, its cheapest valuation ever. Four months later is was more than 50% higher. Cruise industry stocks typically trade for about 16-times earnings. When NCLH got too expensive, in late 2015 and mid-2017, it was mispriced to the upside, and fell back. As of late July, it was almost as cheap, though, as it was late last December. Barring unexpected news, NCLH appears ready for its next big upward march. A conservative 15-times multiple on next year's estimate of $6 supports an end-of-2010 target price of about $90. That goal is not crazy at all, considering the all-time record results the firm has been posting. Independent research from Morningstar seconds that notion. It assigns NCLH a 4-star, out of 5, buy rating. Morningstar does not provide 1-year targets. It does, however, indicate what it feels is present-day fair value for each stock it covers. For NCLH that figure sits at $67, almost 37% above where the stock closed on July 26. Swing traders have made a ton of money with Norwegian's shares. Its most recent three bottoms provided from 51% to more than 120% gains for holding between just four to 20 months. Long-term thinkers should note, too, that Value Line research thinks NCLH will trade between $105 and $160 not later than 2024. I see about 83% in upside potential by the time fourth quarter 2020 results are reported early in 2021. Reward appears to far outweigh risk. We're not talking just 10% to 20% upside here, but 50% to 100%. Owning the stock is the best way to play Norwegian Cruise Line Holdings. Option sellers who wish to scalp some premium, though, might also want to consider selling some in-the-money Jan. 15, 2021 expiration date puts. The premiums and break-even points on the $55 and $60 strikes are shown below. Pricing reflected the underlying shares at $49. NCLH remains one of my largest dollar holdings. I also like Royal Caribbean and Carnival in the same industry group. RCL just reported better-than-expected second quarter results and raised full year guidance. NCLH is due to report early in August. You only get so many chances at good news companies with single-digit multiples. Don't miss your chance to get on board NCLH at today's bargain fare. The money you make might well pay for your next vacation.

Pick the Right Mispriced Stock, Cruise Ahead

Some stocks are too high and others too low when compared with the value of the company -- here's how to play the latter, using Norwegian Cruise Line Holdings as an example.

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