The travel industry has been devastated by the coronavirus. Cruise companies were among the stocks in the sector that sank. Royal Caribbean (NYSE:RCL) dropped from a high of $130 to $20. Norwegian Cruise Line (NYSE:NCLH) fell from $55 to $7.25. Carnival (NYSE:CCL) stock dropped from a high of $45 to $7.90.
However, investors should realize that the travel industry will never disappear.
The pullback of stocks like Carnival is only temporary. Plus, in most cases, the fear of the coronavirus from China has been priced into these names. For patient investors, I strongly believe CCL stock could rebound back to $42 for three key reasons.
Key Reason No. 1– The Fear Has Been Priced Into CCL Stock
Granted, Carnival’s earnings will take a monumental hit from the coronavirus.
That and fears of a “dilutive capital raise” are why Wells Fargo analyst Timothy Conder lowered his price target on CCL stock from $55 to $6. He thinks that the company will have to issue $4 billion to $5 billion of new shares. “While somewhat expected, (these new shares) will be meaningfully dilutive to existing shareholders,” the analyst wrote.
Goldman Sachs downgraded Carnival on expectations that the company’s 2020 earnings would be “40%-50% lower than its initial EPS guidance with more than half of the impact…coming from slowing demand.”
However, I believe that a good deal of this negativity has already been priced into Carnival’s shares.
Key Reason No. 2 – Carnival Is Oversold
The last time Carnival was this cheap was November 1995. In my opinion, the stock’s pullback is overdone at this point. In the long-run, the stock could refill its bearish gap at $42. Also, the best time to buy this stock is when it’s hated the most. When investors are the most pessimistic, that’s the best time to buy it.
In addition, Carnival is exceptionally oversold at its lower Bollinger Band (2,20), with over-extensions on relative strength (RSI), MACD, and Williams’ %R. Every time each of these indicators has aligned in oversold territory for the last year, the shares have rebounded.
The only thing holding down this stock at the moment is herd-like fear.
Key Reason No. 3 – Carnival Always Rebounds From Chaos
I’m not saying that the shares of Carnival are going to recover overnight to $42. Instead, what I’m saying is you may want to consider buying the stock now, when it’s the most hated, then forget about the shares, and check back on them in a few months
As Forbes pointed out, “Carnival stock outperformed the market as H1N1 infections subsided, rising 18% three months after the CDC indicated in mid-December 2009, that cases were steadily declining. In comparison, the broader market rose by less than 5% over this period.”
“Going by the performance of Carnival and other cruise liner stocks over the 2009 H1N1 pandemic, it is possible that they could recover strongly as cases of the COVID-19 virus start to decline globally,” the publication added.
Stocks like Carnival will take some time to recover. It won’t happen overnight. However, if you want to make money as others become fearful, the time to buy Carnival is now.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.