I know what you’re thinking. What the heck is Nic doing writing about investing in Carnival Cruises (NYSE:CCL) after Tuesday’s -8% day? Hey at least it was not Royal Caribbean (NYSE:RCL) which fell 15%. It’s simple, there usually are opportunities when the market freaks out over a headline — especially when it’s a rehashed version of one we’ve seen for a while. Carnival stock and the whole travel cohort, including airlines and Boeing (NYSE:BA), fell on a vaccine headline … again.
Johnson & Johnson (NYSE:JNJ), like Eli Lilly (NYSE:LLY) before it, reported setbacks in their efforts against Covid-19.
But if it’s not these two companies to provide the medicines, it will be Pfizer (NYSE:PFE), or Novavax (NYSE:NVAX) or a dozen other contenders. That topic is old news and changes nothing for Carnival. Dips on that are opportunity for new investors.
Cruise lines are in trouble, but most investors already know what ails them. Therefore the pain is already in the charts for the most part. But for as long as the media is focusing on the topic, every vaccine headline will temporarily whipsaw CCL. So it is important to make the distinction between the short-term knee-jerk reactions and blazing new price paths. Unless the authorities shut down the world again, these headlines are pure noise. Acting on them is likely to create confusion and mistakes.
Carnival Stock Is Doing its Thing and Time Is All it Needs
After a 200% rally off a double bottom in April, Carnival stock fizzled. From high to low, it gave back about 50%.
This should not scare the bulls out of their positions. Rallies need time to consolidate, so there will be weak stints. Sometimes price goes laterally, other times it retreats to prior baselines. Nothing has changed in the setup so there is no reason to panic out.
No one said it will be a magical snap back to normal. In fact, the way forward will be completely abnormal, but Carnival stock is on the mend. The fundamental picture remains unchanged. The travel and hospitality stocks will lag in the recovery efforts. Furthermore, cruises will be the last to recover. There are two main reasons for this.
There Are Challenges
The first challenge is psychological because hopping on a floating hotel doesn’t inspire social distancing. It’s the opposite. Even under the old normal, they had outbreaks of illnesses. People will certainly fear them now even more. I’ve cruised twice, eons ago, and on both trips we saw the orange “biohazard” bags. I am not pressed to take another cruise again.
People need to fly because they need to go places. Ships are no longer a method of transportation so it’s an elective event.
The second obstacle is operational. When they finally set sail again, there will be a mountain of rules and regulations. These are not cheap to implement and enforce. The operating margins will slip. To make matters worse, Carnival and its competitors will likely need to give incentives to encourage clients to return.
These two factors mean that the financial struggle is likely to linger.
On the flip side, Wall Street prices news into stock prices months in advance. Investors will bid the stock up at the hint of improvements.
The Chart Is Uninspiring but so Bad It’s Good
In late July, I wrote that Carnival stock long term favors “more upside potential than downside risk over time.” That is still true now. The technical setup also remains the same. The stock has solid support below and tons of resistance levels above. Each one of those lines will be a battle but then they become the opportunity.
The bottom in April for CCL happened off levels that are 25 years old. We are not likely to have even worse catalysts than the one of the worst pandemics in history.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
