Carnival Cruise (NYSE:CCL) and its peers are coming back to life as the stocks finally perk up a bit. CCL stock has sold off a bit since rallying, but shares are still up almost 20% for the last week of April. At one point, shares were up more than 40% this week.
Its peers are seeing similar jumps, with Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH) riding three-day gains of 36% and 54%, respectively. Of course, this kind of pop gets the obvious question being asked: Is it time to own cruise ships yet?
Trading CCL Stock
CCL stock has been one of the more volatile names amid the novel coronavirus correction. Shares fell more than 84% from January highs to March lows.
From there, Carnival more than doubled to $19.14 before correcting back down to $8. This gave traders and investors alike a beautiful double bottom to measure against. Even for those that missed this chance though, there was an opportunity.
Have a look at the daily chart. After Carnival’s quick bounce off $8, shares chopped in a very tight range between $11 and $13. Amid this chop, CCL stock pushed through the 20-day moving average and downtrend resistance (blue line). It’s hard to call this action a breakout — more like a walk out — as Carnival slowly slipped out from under resistance.
This is good action, but not as good as some investors might think. Admittedly, it’s great that CCL stock didn’t make new lows on the move and that bulls broke it out of the recent range, not the bears. But the stock still has an uphill battle. Upside exists purely from the fact that Carnival was beaten down so hard.
That can give bulls some juice, but the fundamentals will need to start playing catch up in the next few months in order to keep the rally alive.
So what’s behind the latest rally? That question can be examined after answering a different question: why the fall? Carnival and its peers bit the dust, and did so in spectacular fashion. A concoction of negative developments combined to create a potent, nearly lethal cocktail for these businesses.
Breaking Down Carnival
First, the coronavirus hit not just the U.S., but the world. And it’s no surprise by now that nearly every vacation and travel company has been hit. That ranges from Delta Air Lines (NYSE:DAL) to Carnival to Expedia (NASDAQ:EXPE).
However, cruises were getting an even worse reputation, as mega-ships floated offshore packed full of travelers as the highly contagious Covid-19 swept through the ship. With the saga plastered all over the news, it was clear cruising would be out of favor for a while.
With ships docked at port, no revenue was coming in while refund requests were piling up. So were the bills, as negative free cash flow exacerbated the dire financial situation. Making all of it worse, the cruise operators were ineligible for federal government aid, because they are incorporated outside of the U.S.
So in short: bad publicity, no revenue, a draw on cash and free cash flow and no government aid created the perfect storm for an 80%-plus drop in CCL stock. However, there is some good news.
First, the company has raised a bundle of cash. $5.75 billion comes from an aggregate bond sale and roughly $500 million comes from a secondary offering. The Public Investment Fund of Saudi Arabia also gobbled up an 8.2% position in the stock. Combine that with very solid demand for cruises in 2021 and investors have a recipe for a higher stock price.
Let’s see what a dip in CCL stock looks like. A pullback to the 20-day moving average and/or prior range resistance and bulls may feel comfortable taking a shot. But keep in mind there’s still risk here.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
