Lightning Might Not Strike Twice for Carnival

As the poster child for the horrors of the coronavirus pandemic, it’s a bit strange that Carnival (NYSE:CCL) is one of the bright spots of the market. Up nearly 7% on a year-to-date basis, that statistic alone is enough to make CCL stock stand out from the crimson-laden crowd.

Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

Better yet, it’s not just technical factors that have seen Carnival shares move against the grain. Rather, a fundamental justification exists for the enthusiasm. Simply put, people are sick and tired of being sick and tired. Initially, the threat of Covid-19 sparked anxieties due to the unknown variable. But as society has grown acclimated to the crisis, consumers are ready to reclaim their normal activities.

Whether you’re talking about participating in Halloween parties or sailing aboard on a cruise ship, millions of folks are ready to put the last two years behind them. In that sense, CCL stock might be worth consideration for speculators. At the end of the day, society at large cannot isolate itself indefinitely.

As well, my InvestorPlace colleague Dana Blankenhorn brought up an excellent point about Carnival’s rival Royal Caribbean (NYSE:RCL) and its fourth-quarter earnings report. “It turns out people who like cruises really like cruising. It’s not about the destination. It’s about being on the boat, eating and drinking to excess. It’s about the virtual reality of the ship.”

Plus, most countries currently have travel restrictions and a few popular destinations – Far East Asian countries come to mind – are closed altogether. Therefore, those hoping to fly aboard to certain countries may find cruising to be a more accommodating alternative.

But is that really enough to move the needle for Carnival?

Sentiment May Soon Drag Down CCL Stock

As one of the more cost-effective and accessible vacation platforms, Carnival on paper stands poised to vacuum up market share from competing platforms that are unfortunately suffering from pandemic-related disruptions. But in reality, CCL stock may be telling a different story.

With the capital market being forward looking and supposedly absorbing all publicly available information, Carnival’s broader performance is becoming a cause for serious concern. Over the trailing year, CCL stock is down 17%, suggesting trouble sustaining positive traction.

Unfortunately, circumstances could get worse for Carnival and the cruise industry. As you’re well aware, the Federal Reserve will likely have to take aggressive action to mitigate the impact of soaring consumer inflation. Under these circumstances, wages probably won’t keep pace with rising costs – companies usually aren’t in the business of handing out pay raises, especially if their revenue stream has been negatively affected.

Therefore, if costs continue to accelerate, the cruise ship industry could find itself pricing out its core customers. And if I’m interpreting the geopolitical tealeaves correctly, the one cost that will greatly affect CCL stock – the price of energy – will almost surely rise.

Bear in mind, I hope that won’t be the case. However, tensions in eastern Europe appear ready to explode. Russian President Vladimir Putin took the extraordinarily inflammatory step of recognizing rebel-controlled Ukrainian territory as independent states, subsequentially moving Russian troops into those areas on “peacekeeping” missions. The White House calls it an invasion.

Now, I don’t have a dog in this fight other than to say that this is an unnecessary conflagration. True, NATO has been expanding eastward but for what reason? For smaller nations concerned about the very actions that are occurring right now.

But with the warring sides committed to their positions, the circumstance will probably worsen.

A Lot of Ugly Over the Horizon

As I was writing this, the New York Times reported that Russian intrusion into Ukraine saw oil prices jump, nearing $100 per barrel. With consumers throughout much of the world already paying an arm and a leg for transportation fuels, it seems only a matter of time before households start cutting expenses.

In such a circumstance, it’s the discretionary purchases that will go first – and that puts CCL stock against the wall. When you have so many troubles afflicting the world, spending money on a cruise doesn’t seem smart. Instead, we could eventually suffer a recurrence of a rush for supplies, just like the early days of the pandemic.

Because as I mentioned, it’s not just Ukraine that’s at issue here. The western response to Russian belligerence must be severe enough to make China think long and hard about invading Taiwan. Therefore, the idea of exposure to discretionary sectors is not particularly appealing at this juncture.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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