Interest in cruise stocks has remained high this year. However, most of the price action for this group has been trending downward lately. Today is no different: key operators Carnival (NYSE:CCL), Royal Carribbean (NYSE:RCL) and Norwegian (NYSE:NCLH) are all down between 9% and 15% in early afternoon trading.
These rather dramatic moves lower appear to be the result of an analyst note from Morgan Stanley. Analyst Jamie Rollo outlined a dire worst-case scenario for Carnival in the note, which portrayed a bear case of CCL stock becoming worthless.
Now, this sort of extreme bear market scenario requires a number of things to go wrong. Some sort of significant and sustained demand shock causing the cruise line to need to raise capital could be the catalyst for such a move.
Like other cruise operators, Carnival is heavily in debt and has been for years. The pandemic required the company to lever up in order to sustain its fleet. Today, much of CCL’s valuation is the result of investors betting high demand could lead to profitability. However, the debt burden has concerned analysts for some time.
Let’s dive into what investors may want to make of the bearish note on CCL stock.
Cruise Stocks Plunge on Wake-Up Call From Analyst
Carnival and its shareholders have already seen a great deal of pain this year. CCL stock is down more than 55% year-to-date (YTD). Compared to pre-pandemic levels, the decline is even more severe. Accordingly, there’s a strong case to be made that significant downside is already baked into cruise stocks.
The market is rightly assessing these sorts of apocalyptic scenarios right now. Indeed, if we’re headed into a recession, perhaps there’s a lot more to be worried about. At least, that’s how the market appears to be thinking.
With tighter monetary policy comes a much more difficult market for companies to raise money in. Whether it’s equity or debt, investors are going to be less open to throwing capital at companies promising to make future profits. As future profitability becomes more uncertain, this downward spiral could accelerate.
Where Carnival and other cruise stocks go from here remains to be seen. However, it’s clear investors are taking a much more cautious approach to the sector today.
On the date of publication, Chris MacDonald did not hold (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.