The shortened trading week due to the Fourth of July holiday on Friday started strong on Monday, with the S&P 500 closing at a record high, generating a 10.57% return in the second quarter.

One of the stocks benefiting from the index’s 0.52% gain yesterday was Royal Caribbean Cruises (RCL), one of the world’s largest cruise operators. RCL stock was up 1.2% on the day, jumping into Barchart’s Top 100 Stocks to Buy, in the 87th spot.

In the past year, Royal Caribbean’s stock has gained over 100%, hitting 52-week highs on 46 occasions. As I write this on Tuesday morning, RCL stock is trading above $316, poised to set an all-time high.

Times have changed significantly since hitting a 10-year low of $19.25 in March 2020, driven entirely by a global shutdown in travel due to the COVID-19 pandemic.

I’ve been a long-time bull when it comes to cruise stocks generally–and Royal Caribbean Cruises specifically. I like the way it operates its business. I don’t see cruising slowing down without an outside economic or health-related situation slowing it down.

That said, it has never traded higher, and while it has significant momentum—up 21% in the past month alone—its valuation is moving into nosebleed territory.

The FOMO (fear of missing out) on RCL is high. Should you bite and buy some of its stock?

Here are the pros and cons of doing so.

In one word: Valuation. It ain’t cheap.

Analysts expect it to earn $15.42 a share in 2025 and $17.66 in 2026. At its current share price of $316.99, it trades at 20.6 times its forward 2025 EPS and 17.9 times its forward 2026 EPS.

The bullish argument you can make is that this multiple isn’t excessive compared to the S&P 500, which currently trades at 21.9x its 2026 forward earnings.

Before the pandemic, RCL stock had never traded above $150, with a forward EPS multiple no higher than 15.36x (as of the end of 2017), according to S&P Global Market Intelligence.

How do analysts feel about RCL stock? Of the 24 covering RCL, 19 rate it a Buy (4.54 out of 5), so it’s highly regarded by Wall Street. However, the mean target price is $275, 13% lower than its current share price.

Another potential negative aspect of RCL stock beyond valuation is the price of oil. It’s been relatively benign over the past few years, with a barrel of West Texas Intermediate (WTI) hitting a five-year high of $114.84 in May 2022. Since then, it has fallen to $62.50 as of May. Adjusted for inflation, it’s fallen by half.

Oil prices account for a significant chunk of every cruise line’s operating expenses. In 2022, Royal Caribbean paid out $1.07 billion for fuel, representing a 178% increase from the amount paid in 2021. In 2024, it paid out $1.16 billion, which isn’t a substantial increase considering the additional revenue generated.

However, in 2024, fuel accounted for 7.0% of its revenue, compared to over 12% in 2022. That was the difference between an operating margin of 24.9% in 2024 and -8.2% in 2022.

While it doesn’t look like the Iran/Israel/US situation is going to spin out of control, if it does, oil prices are sure to rise over $100 in no time. That’s never good news for cruise stocks.

If oil prices hit $100 a barrel, you can be sure Royal Caribbean’s ability to deliver $17.66 in earnings per share in 2026 won’t be doable.

As Clint Eastwood said in Dirty Harry, “Do ya feel lucky, punk? Well, do ya?”

The trend remains your friend, and I’m not talking about the stock’s momentum, but rather the ongoing demand for cruising. It’s off the charts.

Back in June 2023, I suggested that cruise stocks remained a Buy.

“If the demand keeps up for the next 12-24 months and it gets its operating margins back to where they were pre-pandemic, $94 will appear very cheap for RCL stock,” I wrote in 2023.

“Whether you’re looking at RCL, CCL, or NCLH, their stocks have more room to run in the second half of 2023.”

Royal Caribbean’s stock has gained 237% in the 24 months since, suggesting I wasn’t the only one who felt the cruise operator’s stock had room to run. And run it did.

Is it too late to buy? Maybe.

However, barring a major flare-up in the Middle East, the demand for cruising remains high, as does profitability.

The company reported strong Q1 2025 earnings at the end of April, including an upward revision to its annual guidance. It now expects to grow its earnings per share to $15.05 at the midpoint of its guidance, from a 3.5% increase in net yield.

The net yield is revenue generated per available cruise day, after accounting for commissions, transportation, and other cruise-related expenses. The 3.5% increase is in addition to an 11.6% increase in 2024.

“Bookings for 2025 have remained on track, cancellation levels are normal, and we continue to see excellent close-in demand,” said Jason Liberty, Royal Caribbean’s CEO, in the company’s April 29 press release.

If you do buy a cruise stock, Royal Caribbean is the best option among them.

If you need the money in a year for your kid’s college education, I wouldn’t risk it. However, if you are willing to put aside some dry powder to buy more should RCL stock hit a rough patch in the next year, it’s one of the best S&P 500 stocks to own for the long haul.

I write a fair bit about options. They’re an inexpensive way to bet on RCL’s stock moving higher over the next 6-12 months. The simplest move would be to buy a call deep OTM (out of the money) like the June 18/2026 $410, which will cost you $19.50, or 6.12% of its stock price.

If the share price at expiration is above $429.50 (38.55% higher), you’ll, at worst, break even on the bet, and if it closes much higher than that, you’ll profit nicely from the difference between the share price and the lower strike price.

Worst-case scenario, its share price goes nowhere, and it expires worthless. However, should it move higher, but not quite to the breakeven point of $429.50, you could sell the option before it expires to recover some of your net debit, thereby reducing your loss on the trade.

Will RCL stock be over $429.50 by next June? I’d be shocked if it were, despite my belief that it’s an excellent long-term investment.

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com