It’s Time to Drop the Anchor on Carnival Stock

While it’s true that most investment sectors have suffered steep losses from the novel coronavirus, the cruise ship industry has absorbed unthinkable pain. Set aside the fact that nobody wants to go anywhere, which invariably impacts companies like Carnival (NYSE:CCL), Norwegian Cruise Line (NYSE:NCLH) and Royal Caribbean Cruises (NYSE:RCL). Rather, the industry suffered a black eye due to the Diamond Princess quarantine, which associated Covid-19 with this form of vacationing. As a result, CCL stock has a very tough road ahead.

It’s Time to Drop the Anchor on CCL Stock
Source: Ruth Peterkin /

Let’s face it — cruise liners already have a bad reputation for being mass-scaled Petri dishes. More than a decade ago during the H1N1 flu pandemic, a ship owned by Royal Caribbean had to shorten its itinerary when several crew members fell ill. And more than a few reports have surfaced of poor sanitation and other unpleasantries.

But for CCL stock and its ilk, nothing comes close to the devastation that the coronavirus has imposed. First, what made the Diamond Princess such a headwind for the sector is that it was front-page news for weeks. Therefore, whatever potential customers that were thinking about going on a cruise would likely be lost for some time.

Second, those who were aboard the Diamond Princess would not be quick to forget the weeks-long quarantine at sea. This too would be something that prospective customers would consider, even after the coronavirus fades.

Third, while the drama for the Diamond Princess is over, for many others stuck at sea, the nightmare continues. According to the U.S. Coast Guard, there are still thousands of people anchored in our territorial waters but unable to dock.

In this environment, I can’t imagine anybody wanting to go cruising.

CCL Stock Facing a Bleak Future

At this point, the only hope I see for CCL stock in any reasonable timeframe is if the economy rebounds in a V-shaped pattern. But the more I dig into the data, the less confident I am for such a scenario.

Indeed, a strong possibility exists that we haven’t seen the worst of the damage. Following the end of World War II, the Dow Jones Industrial Average has recorded 10 quarters which suffered a loss of 10% or more against the sequentially prior quarter. Currently, we are on pace to record a 14% loss in the second quarter.

Dow Jones' historical performance following a 10% quarterly loss
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Source: Chart by Josh Enomoto

During the Great Depression era, the period had eight quarters of double-digit percentage losses. However, the difference is that the Great Depression featured multiple quarters of steep negativity. In the post-World War II era, we’ve enjoyed mostly quick recoveries from our steepest market downturns.

Yet if history repeats itself, we could be due for prolonged bearishness. Keep in mind that prior to the Great Depression, the Dow Jones also experienced quick rebounds from severe downturns. That is until Black Tuesday taught everyone a lesson. Perhaps the coronavirus will teach the same lesson to the modern generation?

If so, this obviously bodes extremely poorly for CCL stock.

Even if we avoid a depression or recession, I don’t see the immediate buy case for Carnival. As I previously argued, the horrible suffering during the Great Depression caused a generational behavioral shift. Those who survived it never forgot. And that’s why it’s not unusual to see hoarding behavior among Depression-era Americans.

In our case, it’s all about social distancing. But I’m not sure how you can reasonably practice that when you’re breathing the same recycled air of a cruise ship. Thus, I’m skeptical about CCL stock.

Cruise Ships Are Completely Unnecessary

As you’re aware, more than 22 million Americans have filed for unemployment benefits since President Trump declared a national emergency. According to some economists, we may already have an unemployment rate over 20%.

If that wasn’t bad enough, the labor force participation rate, which in my opinion is a more accurate picture of our employment situation, has dropped to 62.7%. In January 2017, when Trump took over the Presidency, the rate was 62.8%. Logically, with fewer people working, vacations are the last items on the family budget, if they’re even there at all.

But the kicker for me is that if some people are able to vacation, they probably won’t choose cruise ships. Not only did the rapid spread of Covid-19 aboard vessels frighten customers across the globe, the resultant governmental response is arguably worse. What could possibly be more stressful than facing a pandemic stranded in foreign waters?

Then comes another question: Who’s going to pay for such an awful experience? For this and myriad reasons I haven’t addressed, I’m going to sit out of CCL stock.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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