Carnival’s Fortunes Are Pinned to the Recovery, Not the Virus

Stocks to sell

The good news for Carnival (NYSE:CCL) is that the company’s stock is 80% higher since bottoming out at just under $8 in March. However, the bad news for CCL stock is that it’s still down over 70% since the first of the year.

Source: Ruth Peterkin / Shutterstock.com

For most of the last three months, the narrative surrounding Carnival was one of cautious optimism. The industry was being hit with the perfect storm. But the conventional wisdom said as quickly as they lost revenue, they could get it back. This was based on the “V-shaped” recovery model.

However just like predicting the weather, this economic recovery is proving to be, at best, an educated guess. And as hopes for a V-shaped recovery evaporate, it’s making CCL stock look a lot less attractive.

CCL Stock Was Dropping Before the Pandemic

When a ship in your fleet goes under quarantine in a foreign country, things aren’t going to go well for your company’s stock. But that isn’t telling the whole story. Carnival’s stock has been in a downtrend since the beginning of 2018. Shares had dropped nearly 30% in the two years ending in December of last year.

So, while the novel coronavirus did Carnival no favors, there was something going on prior to the pandemic. For its part, Carnival removed any economic guidance in its last earnings report. While that’s prudent, it adds another layer of uncertainty to CCL stock.

And that’s why it may not be enough to simply hope that the cruise line can just hang on until customers return. Especially when it seems like the economy may be weaker than we know.

It’s the Economy, Stupid

Yes, I’m resurrecting the famous (or infamous) battle cry of the 1992 Presidential election. But it’s an election year, so it seems fitting. Because the problem for Carnival at the moment is that the economy is not recovering as fast as was hoped. And that means you may be seeing the “open for work” graphic overlaid on the picture of your LinkedIn contacts.

On May 27, Boeing (NYSE:BA) announced it was laying off 7,000 workers. That same day, Chevron (NYSE:CVX) announced it would cut 10% to 15% of its workforce. But those were expected, right? Airlines and energy companies were always going to be the slowest to come back.

But just this week, layoffs were announced at Levi Strauss (NYSE:LEVI) and Whirlpool (NYSE:WHR). In the case of Levi’s, the company was cutting approximately 700 jobs which would total about 15% of its global corporate workforce. Whirlpool did not specify the exact number of jobs it was cutting but said it would result in $95 million in severance and other employee-related costs.

Okay, enough of the gloom and doom. The fact is, unlike hourly workers, many of these employees will receive a severance package. But that’s my point. These workers won’t show up in the count of employees who are filing for unemployment claims. Yet they will still have an impact on the economy.

Families that are facing an uncertain future will pull back on spending. That means even if a vaccine is coming faster than expected, these customers are not likely to book a cruise. And they’re also likely to cancel one that they may previously have rescheduled.

And Speaking of a Vaccine…

Shares of CCL stock are bobbing up and down on every morsel of news. Larry Ramer made a case that a vaccine that arrives later this year may be a catalyst for the stock. David Moadel also expressed cautious optimism for similar reasons.

The country needs a vaccine. But I suspect even if a vaccine was available tomorrow, it wouldn’t influence people who want to see the worst. We are living in a time when many people are stuck in a narrative of their own choosing. And that’s a shame because the book gets a lot more interesting when the mind is open to different thoughts.

But that’s where we are. And that means a bet on CCL stock is a bet on a vaccine by the end of the year and a robust economic recovery. Getting one out of two will feel like a victory.

 Ask Me Again in November

Just as the country needs a vaccine, it also needs to see this election cycle end. And the sad part is it hasn’t even really begun. But election years always create uncertainty and this year is particularly the case (but we seem to say that every four years).

However, until we know who is going to occupy the White House for the next four years, it’s tough to gauge what the economy will look like. And that’s why I think it’s best to pass on Carnival at this time.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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