The market’s enthusiasm for Carnival (NYSE:CCL) has dipped in recent days. Earlier this month, investors were highly bullish on CCL stock, bidding it up from $16 per share to nearly $25 per share.
But, as fears of a “second wave” of the coronavirus have started to increase, Wall Street is second-guessing its recent enthusiasm. The Street now realizes that a V-shaped recovery may not be in the cards for the cruise sector.
Other hard-hit industries like airlines and casinos could recover much more quickly than anticipated. But so far, that scenario isn’t playing out with the moribund cruise sector. On June 22, Carnival extended its suspension of North American cruises until Sept. 30.
Carnival initially planned to resume its operations on Aug. 1. But, with its “return to normal” timeline pushed back another three months, the company’s heavy losses will continue to pile up.
In short, the waters ahead remain choppy for the cruise-line giant. And, with its shares still up more than 100% from their 52-week lows, the ship has probably sailed on making a bottom-fishing bet on the stock.
With that in mind, it may pay to take a “wait-and-see” approach before making a contrarian bet on a cruise-line comeback.
CCL Stock and “Second-Wave” Fears
As InvestorPlace columnist Dana Blankenhorn wrote in his June 17 column, the shares have many positive attributes. These include pent-up demand for cruises, Carnival’s size and scale relative to its rivals, and its ability to raise further capital via the bond markets.
Yet, while these factors may work in Carnival’s favor, they will all go out the window if there’s a second wave of the coronavirus. Even though Carnival’s ships are docked until October, experts like Dr. Anthony Fauci have said it’s possible a second wave could hit in the fall.
If that happens, forget about a “comeback” for the cruise-line operator. The company’s current cash burn of roughly $650 million per month could extend through the end of 2020. In short, the odds of Carnival failing to survive the pandemic are rising.
With that in mind, “buying the dip” of CCL stock doesn’t look like a good idea.
Is Carnival Really the Strongest Cruise Stock Out There?
But that’s up for debate. As another pundit wrote last month, Royal Caribbean may have better odds of survival than Carnival. Even though Royal Caribbean is much smaller than Carnival, it may recover faster, since its target market is different than Carnival’s.
Also, Carnival may be behind both its top rivals in terms of liquidity. In other words, both Royal Caribbean and Norwegian could ride out continued shutdowns much longer than Carnival.
In theory, buying the “cheapest” cruise stock based on valuation metrics may be a smart way to bet on a comeback. But, as InvestorPlace’s Matt McCall has said previously, it’s tough to value Carnival right now, given its limited visibility.
With continued losses on the horizon, forward price-earnings ratios can’t be used to value the shares. Book value is also useless. That’s because, given the cruise industry’s condition right now, the company’s primary assets, ships, are likely worth less than what its balance sheet says.
In short, Carnival has become a game of “predicting the unpredictable.” Sure, you can buy the shares now and assume that their gains will trump the firm’s still-lingering risks. But why buy the shares now if the stock could easily near its prior lows? The risk/return proposition doesn’t appear to be in Carnival’s favor at the moment.
Sit Tight Before Diving Into High-Risk Carnival Stock
Investors may be less fearful of cruise-line bankruptcies now than they were a few months back. But the (perceived) increased odds of Carnival’s survival are more than priced into its shares. Its continued reopening delays, along with a “second wave,” could doom the company. And its rivals like Royal Caribbean and Norwegian may be financially stronger than Carnival. Consequently, buying Carnival’s shares now doesn’t appear to be wise.
For now, avoid CCL stock. But if it dives further, give the stock a second look.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.