Carnival (NYSE:CCL) and its cruise line peers are the epitome of cyclical names. That much as on display on Friday, June 5 as CCL stock surged 15.42% on the back of a May jobs report that wasn’t nearly as grotesque as expected.
In fact, 2.5 million jobs were added last month, trimming the unemployment rate to 13.3% in the process. That’s good for the best monthly gain on record. Yes, the number deserves an asterisk because many of those jobs aren’t new. The “gains” are largely attributable to furloughed employees in industries stung by the novel coronavirus getting back to work.
Still, the reaction by Carnival stock to the May jobs report is an obvious reminder that if the highly anticipated V-shaped economic is here, many of the names that were most repudiated during the worst days of the pandemic now offer significant rally potential. Cruise operators are in that group.
This Is An Anticipation Rally
During the course of the Covid-19 pandemic, airlines, casino operators, and cruise lines were often lumped together. A logical school of thought given the dependence of those industries on leisure travel and concerns that that demand would evaporate due to the virus.
Fast-forward to today and airlines are flying, casinos are opening, but cruise ships aren’t sailing and it could be the fourth quarter before that happens. The explanation for how names such as Carnival, Norwegian Cruise Lines (NYSE:NCLH) and Royal Caribbean (NYSE:RCL) are rallying even though they’re not doing much, is anticipation.
Market participants are looking at stronger-than-expected bookings data from airlines and the throngs of people heading back to casinos and forecasting similar affinity for cruises. Some analysts have their doubts. Last week, Morgan Stanley analyst Jamie Rollo restarted coverage of Carinval, Norwegian, and Royal Caribbean with “underweight” ratings.
“The cruise industry will take longer than almost any other form of travel to return to normal,” said the analyst.
It’s a fair point, if for no other reason than that Carnival and friends are under a no-sail order that lasts until late July. Additionally, cruise operators’ lengthier recovery timetable is priced into these names because it’s been a known quantity for some time. As travel names battered by Covid-19 started perking up, the consensus among analysts was that it would be 2022 before airlines and casinos returned to pre-virus capacity levels. But for cruise companies, that timeline jumped to 2023 or 2024.
One way of looking at that 2023 or 2024 forecast is that it gives Carnival a lot of leeway to potentially surprise investors. If bookings, which some industry operators are already saying are shaping up to be better-than-expected for 2021, surprise to the upside, then there’s a credible case for the industry getting closer to its 2019 self next year or in 2022. That would be enough to facilitate more upside in the names mentioned here.
Bottom Line on CCL Stock
To be sure, any of the names and industries most hurt by the coronavirus that are now rebounding still offer downside risk. There could be a second wave of Covid-19 cases. Companies could opt to conserve cash and not rehire workers en masse, making the the May jobs report a one-off event.
Of course, there’s also fear of “secular” changes in travelers’ behavior in a post-coronavirus world. However, using recent price action in airline and gaming stocks as the template, it’s not a stretch to say traveler behavior isn’t changing all that much, which should trickle down to cruise lines.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
