Carnival (NYSE:CCL) is starting to stall out, as it lacks buyers in a time of uncertainty. It’s no wonder investors do not want to buy CCL stock, even though the company has taken measures to shore up its liquidity.
Remember, Carnival raised debt and pushed through a secondary offering in an effort to bolster its balance sheet. That was smart (and necessary) thinking, but it can only buy so much time.
While the cruise operator may not be heading for a liquidity event in the short term, the combination of a no-sail order and uncertainty surrounding the novel coronavirus has the stock stuck at port.
No Sail Equals No Revenue
The Cruise Lines International Association recently said that, “We believe it is prudent at this time to voluntarily extend the suspension of U.S. ocean-going cruise operations to Oct. 31.”
In other words, Carnival, Royal Caribbean (NYSE:RCL) and Norwegian Cruise Lines (NYSE:NCLH) will continue to see severely curtailed revenue. What will Covid-19 look like in a month? How about three months? How will it be during the normal cold and flu season?
There are so many questions and not enough answers to get an idea of what these businesses will be like. While Ford (NYSE:F), Delta Air Lines (NYSE:DAL) and others are also under pressure, they at least have revenue returning to the mix.
With coronavirus cases remaining elevated, there’s no clear sign when Carnival and its peers will return to sailing. Until that suspension is lifted, it will be hard for CCL stock to gain upside momentum, in my view.
Trading CCL Stock
As for that momentum, let’s take a closer look at the charts.
In March and April, CCL stock put in a beautiful double bottom at $8. At the time though, it felt like the world was ending and that Carnival had real liquidity concerns. That’s when it raised debt and did a secondary offering at $8, making this level even more significant.
After that second tag of $8 in April, shares immediately ripped back above $11 about three trading sessions later. Then that mark became important support over the next few weeks before acting as the reversal level amid the May selloff.
For two months now, CCL stock has been quietly chopping in a sideways pattern. It’s the market’s way of waiting to see which way things will go. If the coronavirus situation improves and sailing suspensions are lifted, this name should break higher. If the Covid-19 case count continues higher and cruise ships remain at port, a break lower is possible.
On the upside, I need to see Carnival clear the 50-day moving average, then $18. These levels have been acting as resistance and until they are reclaimed, CCL stock will struggle for upside momentum. Ultimately bulls will be looking for a retest of the June highs near $25 and the 200-day moving average.
On the downside, a break of $13 support likely puts that $11 reversal level in play I mentioned earlier. A close below this mark and it’s possible the stock revisits $8.
Bottom Line on Carnival Stock
So what do investors do with Carnival stock — buy or sell?
Most investors think too much about cost basis. I love a good price on my long positions, too. However, I think buying with momentum or having an attractive risk-reward is a better approach.
Meaning that I would rather wait for CCL stock to have some wind in its sails and be moving higher, or buy on a deeper decline into some of the support levels I just outlined. Specifically, I would like the $11 and $8 levels.
That’s opposed to buying now and hoping that the stock can take out resistance and move higher. Buying now means that a dip to $11 leaves investors down about 25% on their position even as the setup gets more attractive. Not that $8 may be that likely, but should we get there again, investors will be down 45%. That’s not good.
Let’s not mistake the situation with Carnival stock. As of the end of May, the company had $7.6 billion in total liquidity, while estimating cash burn for the second half of 2020 at $650 million. That’s not great news, but it’s certainly not the worst case scenario. A little more clarity will go a long way with this one — both on the charts and fundamentally.