Hold On to Six Flags Stock But Wait For More Thrills Before You Buy

Six Flags (NYSE:SIX) reports earnings on February 24 and the news is not likely to be good. Analysts forecast negative earnings per share (EPS) of $1.02 on revenue of $87.04 million. The whisper number puts the EPS slightly lower at ($1.10). Does this signal that the company’s strong run is over?

Many investors would have seen Six Flags as an untouchable stock in 2020. The company had to close its entire network of theme parks in response to the Covid-19 pandemic. Still, investors that bought SIX stock at the depth of the pandemic have been rewarded with a gain of nearly 270%. And the company’s leading competitor Cedar Fair (NYSE:FUN) is up 256% in the same period.

This is not just a contrarian play. Six Flags successfully worked with its lenders to renegotiate key leverage covenants. This will ensure that the company can successfully reopen with some extra time to recover from the effects of the pandemic.

Does a Template for Reopening Exist?

Some believe that Disney’s (NYSE:DIS) reopening of Walt Disney World in Florida can provide a template for Six Flags to reopen. Keep in mind, even as more people are vaccinated, public health experts are cautioning that many of the measures that were taken during the pandemic may still be required as the country reopens.

And the reality is that many potential customers will demand that theme parks take these measures even when the immediate threat of the pandemic is long gone.

Disney has largely been praised for the measures it has taken. And, although this is difficult to conclusively prove, there has been no direct evidence that the re-opening of Disney World has led to community spread.

The Easy Gains Are Gone

However, putting the debt issue aside, most of the stock’s gain is in anticipation that the company would be able to reopen its parks for the 2021 season. And the company is planning to do just that. However, with the stock up 270% from its pandemic lows, the easy gains may be gone.

To justify a further rise in the company’s stock price, investors will want to see how much traffic will return. If the analysts’ estimates are accurate, Six Flags will deliver full-year 2020 revenue of approximately $337 million. With the parks re-opening, the company is almost assured of seeing higher revenue numbers. But it’s unlikely that it will be able to approach the $1.48 billion that Six Flags posted in 2019.

And investors aren’t likely to start getting that data until the second quarter. Six Flags is a predictably seasonal business, and the first quarter is historically a weak quarter. That will be the same for this year because parks won’t be reopening until the spring.

 Wait For More Data Before Adding to Your Position

With the stock looking overbought, I think SIX stock is likely to drop post-earnings as investors look to take profits. The stock is nearly 30% below its high price for 2019 despite the fact that revenue is unlikely to approximate those levels.

However what should happen and what will happen are two different things. Although I believe the easy gains are gone, traders still hold bullish sentiment on SIX stock. The stock closed at a new 52-week high on February 22, but the relative strength indicator (RSI) suggests the stock is overbought. That bullish sentiment may change after the earnings report. Investors will want to hear more about the company’s guidance regarding reopening.

I’d be interested in the stock if it gets between its 20-day and 50-day simple moving average. That would put the stock about where it was to start