A Long Recovery Negates the Discount in Carnival Stock

It could represent great value, but not right now

Despite ending a strong week in the markets, it’s admittedly little solace to those who have suffered huge losses. That pretty much describes everyone. But few are as devastated as stakeholders in the cruise liner industry. Names like Carnival (NYSE:CCL), Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH) have witnessed an almost vertical drop from their February highs. For CCL stock in particular, it’s down 77% on a year-to-date basis.

A Long Recovery Negates the Discount in CCL Stock
Source: Ruth Peterkin / Shutterstock.com

Given the steep drop, though, the red ink has invariably attracted contrarians looking to pick up a once-in-a-lifetime discount. Certainly, I admire their bravery. Furthermore, I see the case for CCL stock becoming a bargain value play. Nevertheless, you have got to recognize the situation for what it is. As things stand now, we’re walking on uncharted territory. Thus, caution — not contrarianism — is the smart approach for the cruise liners.

Obviously, the impact both on sentiment and PR have been devastating for CCL stock. Troubles first started with Carnival’s Diamond Princess cruise ship. From one confirmed case of the novel coronavirus came a torrential wave that resulted in 712 cases and 10 deaths. In addition, the Diamond Princess was left stranded for weeks as the Japanese government worked out a plan.

From the consumer’s perspective, the idea of being stuck in a floating prison isn’t exactly a great marketing message.

As if that weren’t bad enough, President Donald Trump signed a historic $2 trillion economic stimulus bill. However, the cruise liners are not part of the corporate bail outs. Unfortunately, this leaves investments like CCL stock in limbo.

I’m not saying it’s lights out for Carnival, but speculators ought to tread very carefully.

CCL Stock Depends on a Confident Consumer

As you know, cruise ships aren’t exactly what you call necessities. Sure, they’re great fun — when you’re not forcibly quarantined — but in the worst-case scenario, people can survive without that experience. But the same can’t be said about basic necessities, which is why you’re seeing typically boring stocks move higher.

In other words, CCL stock and its rivals depend on strong consumer sentiment. If regular folks believe that there will be a stable economy tomorrow, they’re more willing to splurge today. I’m not breaking new ground when I say this.

However, the math demonstrates that Carnival performs best when the University of Michigan’s Consumer Sentiment index is moving in a positive direction. For instance, in the 1990s, the correlation coefficient between CCL stock and consumer sentiment was 87.3% — as sentiment moves higher, so too does CCL. In the 2010s, the correlation was even stronger at 91.7%.

A Long Recovery Negates the Discount in CCL Stock
Click to Enlarge
Source: Chart by Matt McCall Research Team

Without the pandemic’s severe shock to Carnival’s average share price, this binary relationship was poised to move higher. Instead, we’re in an extraordinarily unusual mess.

One notable period I’d like to discuss is the 2000s decade. Here, there was no statistically significant relationship. That said, it appears that consumer sentiment — which was driven lower due to the 9/11 terror attacks and subsequent military conflicts — represented a harbinger for Carnival and other discretionary companies.

Therefore, I’m interested in getting additional data from the sentiment index before making a move on CCL stock. Personally, I’d like to see a bottoming, then a gradual progression in confidence. Without that confidence, it’s difficult to justify vacation stocks.

Again, we’re in unprecedented territory. For most families, their number one priority is having food to eat and keeping the lights on. Therefore, frivolous activities like a sea voyage can wait.

Patience Is Your Friend

If I haven’t convinced you to cool your jets on the cruise ship industry, consider this: the coronavirus is not the only health-related hazard for the sector.

Before this pandemic dominated headlines, cruise ships were vulnerable to noroviruses. This is a significant reason why is that the norovirus is extremely contagious. Trapped with thousands of other passengers, this virus can spread quickly, potentially giving the industry a black eye in the post-coronavirus future.

Moreover, cruise ships themselves have surprisingly inadequate structural resilience. In some Carnival cruise ships, “brown water” discharges have occurred in the medical center. Typically, discharges have a negative connotation. But brown discharges? Uh, no thanks!

Put another way, it’s a long road ahead for the sector to recover from the financial and optical damages. So, like I said, CCL stock may become a great value play. But that time is not today.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve nowMatt does not directly own the aforementioned securities.


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