Carnival Corporation (NYSE:CCL,NYSE:CUK) stock has found a bottom. And with shares still down 78% from January levels, many CCL stock investors no doubt expect a bounce to follow.
But there’s a key rule investors need to remember when it comes to CCL stock. In fact, it’s a key rule for all stocks. Just because a stock is cheaper doesn’t mean it’s cheap.
After all, the market is a forward-looking mechanism. That’s why I try and guide investors to profit from “megatrends” like digital payments or Big Data.
And so often when a stock falls, it falls for very good reason. It falls because the market is discounting bad news going forward. The danger of ignoring that fact was made clear over and over even during the bull market.
Investors spent years chasing Chesapeake Energy (NYSE:CHK) because it was “cheap.” CHK was cheap for good reason, however: it was on the wrong end of a megatrend. Oil now, incredibly, is trading below zero (if temporarily so) and Chesapeake has a real chance at bankruptcy.
Retail stocks spent the last decade as usually the cheapest sector in the market. Investors kept buying the likes of Sears Holdings (OTCMKTS:SHLDQ) and J.C. Penney (NYSE:JCP) on the dip. Sears has gone bankrupt, JCPenney is likely to follow, and Macy’s (NYSE:M) is at $5.
Sometimes stocks fall for the wrong reason. I believe that’s what happened with the broad market last month, as investors sold off U.S. stocks in a panic. It’s why, at the time, I consistently advised investors to keep calm and look ahead.
But that advice is particularly important for Carnival. Because what’s ahead is a long, hard slog.
CCL Stock At the Lows
The fact that CCL stock has bottomed admittedly makes some sense. As I detailed earlier this month, Carnival was able to raise $6.25 billion in cash, most of it in debt. That seems to take near-term bankruptcy off the table.
Indeed, even though Carnival sold $500 million of stock at $8, shares have rallied to $12. The capital injection clearly recaptured some investor confidence that the worst-case scenario wouldn’t play out — at least immediately.
Meanwhile, Carnival has slashed operating costs. It’s canceled all cruises through at least late June. Its last three cruise ships still at sea — one of which left port on Jan. 5 — will finally go home this week.
Those cruises no doubt cost Carnival millions of dollars. Refunds will eat up even more cash. But with those trips ended, Carnival can finally get back to some semblance of normal. The cruise operator at least can match its schedule to demand. Customers going forward will know the risks.
Again, Carnival stock is much cheaper. I can see why an investor might look at CCL stock at $12 in April and $52 in January and see huge potential returns. Shares would rise over 300% if they returned to those January levels. Even if that process takes five years — even if it takes ten years — that’s an enormous opportunity.
The Case for Caution
But, again, stocks often get cheaper because their outlook has changed. And it’s almost impossible to argue that the cruise ship industry hasn’t been permanently altered by the novel coronavirus.
There’s simply no way that the industry can completely calm fears of coronavirus or other potentially infectious diseases. This is a business built on offering buffets, live shows, and packed swimming pools. There are going to be many customers simply lost for good even once the current crisis passes.
Over time, does the cruise industry rebound to some semblance of normalcy? Most likely. But that doesn’t mean CCL stock rebounds above $50. The company is going to likely lose billions of dollars in the intervening years. It’s committed to spending over $11 billion on new ships that quite literally may have nowhere to go.
That $11 billion is a sum still greater than Carnival’s market capitalization. After the capital raise, there’s another roughly $15 billion in debt on the books as well. Given that Carnival recently added secured debt at a whopping 11.5% interest rate, the bond markets clearly show the mid-term risk.
No Need to Rush
Again, at some point the cruise industry will return to normalcy. I expect it will be a smaller business. But there still will be demand, and there still will be profits to make.
That alone, however, doesn’t mean Carnival stock is a buy here. It’s not as if investors are pricing CCL for bankruptcy: the current market capitalization is nearly $10 billion.
That’s with billions of dollars in costs still on the way — and revenue that’s likely to stay depressed for years. It’s with generational changes providing a potential headwind, as younger customers worry about environmental and labor policies.
Over time, CCL stock probably rallies. But I’d emphasize the word “probably.” Interest expense alone is going to run at over $1 billion a year. There’s a scenario in which the industry doesn’t recover. In that scenario, CCL stock is not going to have anything close to a $10 billion market capitalization.
Admittedly, that’s probably too pessimistic. But I’m skeptical the rally in Carnival stock proves to be V-shaped, or that the stock sees $50-plus again. There are years of work ahead for Carnival and its industry. Earnings are going to be low for quite a while.
Even if an investor sees long-term value here, I’m skeptical there’s any real need to buy in April 2020 for a story that isn’t likely to play out for years — if it plays out at all.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
