Carnival Cruises (NYSE:CCL) stock is one to own even if it doesn’t have an immediate catalyst lurking. The whole sector underwent a test from the pandemic in a way that could not have been tougher. In spite of it, CCL stock survived and has built a strong base.
This is not to say that they are into smooth sailing (pun intended). Cruise lines are still facing tremendous hurdles and they probably will be the last industry to thrive.
All travel, hospitality and leisure businesses had to close their doors during the height of the pandemic. Some segments are coming back, like hotels, for example. Albeit the rate of return has been at a snail’s pace. Even airlines are still down 50% to last year judging by the TSA U.S. daily screenings.
The cruise lines are last in line on that echelon. Even before Covid-19 there was talk of the odds of getting sick on ships. If you scour the web you would find stories of upset stomachs and more. Going back to normal would be a welcome change as long as the operators can avoid the Covid-19 outbreaks.
CCL fundamentals collapsed last year. The net income on their P&L went from $3 billion per year in 2019 to -$3 billion a quarter. They were in panic mode and their survival was in question. This wasn’t a Carnival-specific problem. The whole cohort was against the ropes and gasping for air.
Late last year Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and AstraZeneca (NASDAQ:AZN) came to market with their Covid-19 vaccines. Many more are on schedule to follow suit this year. Therefore I expect that 2021 will be a recovery year for the business. The result should be a bounce in CCL stock to fill the February gap.
The Upside Opportunity in CCL Stock Is Huge
After the March crash the stock market indices not only recovered but exploded higher. The NASDAQ was the first to set new highs and the rest followed. All major indices have not stopped setting records since then. The S&P broke its milestone already this week. The small-caps are doing it this morning.
Carnival Stock hasn’t even recovered half of its drop let alone set new highs. It sits here 70% below that mark that it set early in 2018. But therein lies the opportunity because the industry has fans. The people that I know who cruise love it. Once humans gain confidence in the vaccine they will go back to it with a vengeance. Cruising is not dead. The proof is in how well the stocks did even when they were legally barred from accepting bookings.
To invest in CCL stock now takes courage and conviction. Investors will need to ignore all the usual fundamental metrics because they are still awful. This is the case where the bulls will have to plug one’s nose and buy it for the long term. I bet that by mid-year they would have more answers on that front. The clues will come from the charts.
The first important level to hold is near $18 per share. That’s the base that has fueled the current rally. Also, if price can get above last week’s high ($29) then it would have a chance at a massive rally. The momentum from that should bring the fight to $25 and that’s where the big fun starts.
I’ve been very consistent when writing about the upside opportunities in the stock. So far my enthusiasm after dips hasn’t been off the mark. No, I am not a perma-bull because I’ve also written about downside potential after big spikes. It will take a long while but in the end the world will go back to its old habits. This makes the opportunity here an investment, not a trade.
The Largest Hurdle Facing the Bulls
Carnival stock has failed miserably twice already near $25 per share. Step one is to overcome the resistance. It won’t be easy because the sellers have history on their side. It will take a strong burst to push past them there. The buyers will likely need a tailwind of sorts, first from the whole market, and second from internal momentum.
Support is strong because the time between the June and December $25 fails is now an asset. The stock took its time consolidating, building a solid base there. That’s something the bulls can rely on in their upward fight.
It is important to not be greedy and to stay grounded. The upside of CCL stock has limits so it’s important to be realistic with targets. I suspect that there will be sellers lurking at $25 and $28 per share. Above that there should be even more sellers above $32. That’s a level that has history from March of 2020 but also from as early as 2014. Such pivots are rarely easy lines to pierce, so expect a slog on the way up through them.
Build a Buffer for an Easier Way to Trade Carnival Stock
Using options scares many investors, but in some cases it actually is safer. Instead of buying CCL stock at face value and risk $20 per share I can create a buffer. By selling the July $12.50 put option investors collect $1 per contract today. All they have to do in return is promise to buy the shares 35% cheaper than today.
If price stays at least $12.50 or higher by mid-July then they would have created profits out of thin air. Think of this as a hedge just in case the support temporarily fails. Why be long from here without any room to breathe? Splitting the strategy is a smart compromise so I can buy half the shares and sell the rest in puts.
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.
