I’m anything but a chartist. However, after reading an article that suggested Carnival (NYSE:CCL) stock was trading 60% below its pre-Covid levels, I just had to take a look at the long-term chart.
I found that the author of this article in question may be right on the money.
CCL Stock and a $20 Floor
Carnival’s share price first crossed above $20 in June 1997. In the nearly 25 years since, it’s dropped below $20 on just three occasions – June/July 2000, March 2009, and April 2020 – which tells me just how rare the past two years have been for the cruise ship operator.
When it hit $7.80 on April 2, 2020, it was trading in uncharted territory (pun intended). The last time it traded this low was in 1992, almost three decades earlier. I congratulate you on your astute buy if you dared to buy during the 2020 correction and are still holding.
So, from my layman’s perspective, $20 seems to be a pretty obvious floor price on CCL stock. Having said that, support lines, like rules, are often meant to be breached. So the question for investors to ponder is whether a dip below $20 is in the cards after bottoming out in late January.
As my InvestorPlace colleague, Alex Sirois, recently suggested, the dip in CCL stock is a buying opportunity. Sirois believes that the company’s managed to maintain significant liquidity despite the fact it’s barely had any business over the past 12 months.
“Carnival is still the biggest cruise ship operator on the planet, and that means its still a rebound and reopening play,” Sirois wrote on Feb. 8. “Because until there’s some sort of signal that some other firm can dethrone Carnival, that argument will continue to hold water.”
He’s not wrong about that. Although, it also can be said that there are plenty of examples suggesting the biggest isn’t always best.
Further, it currently has an Altman Z-Score of 0.10. Anything under 1.81 is considered in distress, possibly facing bankruptcy proceedings within the next 24 months. Its two biggest rivals are in the same position.
It’s important to note that the Altman Z-Score is a fluid number. The better your finances get, the higher your Altman Z-Score goes. So in a year, it could very well be above the distress line, driving CCL stock higher.
I’m a Cruise Industry Fan
Although I consider myself a supporter of cruising stocks – Royal Caribbean (NYSE:RCL) being my favorite – I do know how much debt these businesses take on to build these hotels on water.
On the one hand, it’s a significant turn-off to own a stock with so much debt. On the other, the amount of capital required to run a cruise line acts as a substantial barrier to entry. As a result, Carnival likely won’t have to worry about two or three competitors entering its arena in the next few years.
Interested investors will have to weigh the likelihood of another virus showing up that spreads as quickly as omicron but kills like the delta variant. If that occurs, I don’t care how freedom-loving your state’s government is; they will be forced to shut down the whole place to avoid catastrophic death.
That’s especially true in Florida, where many of Carnival’s ships sail from, and where many of its inhabitants are old and susceptible to any virus, let alone one as vicious as delta.
So, when you bet on Carnival, you’re rolling the dice that the worst is behind us.
My guess is that if you bought CCL stock at $7.80, you’ve already sold your position, or at the very least, got your initial investment out. I don’t see a problem letting your gains ride if you’re the latter. The worst-case result is it goes to zero, and you break even.
If you haven’t bought it already, it’s essential to consider the probabilities of making money buying at $23. The median target price of the 20 analysts covering CCL stock is $24.50. That’s not a whole lot of upside. In addition, the average analyst rating is “hold” with three “sell” calls, one “underweight” and 10 “holds.”
The risk-to-reward proposition at $23 isn’t nearly as enticing as it was at $8.
The Bottom Line
In August 2002, I suggested that Carnival had gotten much cheaper and more attractive.
“I believe Carnival stock returns to the $40s or higher, once a vaccine is found, and the world figures out how to cope with Covid-19, as we’ve done with the flu,” I wrote on Aug. 3, 2020. “If you’re an aggressive investor, buy some now, and wait for it to fall into single digits. Unlike most of my colleagues, I’m bullish on the cruise industry.”
I didn’t quite get there, falling to a low of $12.11 on Oct. 29, 2020, before moving into the $20s by November that year. No matter. It was a good thought. It hasn’t quite doubled, but it’s pretty close.
My inclination at this point is to recommend investors buy a half position at $23 and change and wait to see if it falls into the teens. If so, buy some more. If it gets to $26, I’d probably fill the second half of your position.
Either way, this is no sure thing. Govern yourself accordingly.
On the date of publication, Will Ashworth 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 InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.