With a No Sail Order currently in place in the United States, it’s tough to build a bullish case for cruise ship operator Carnival (NYSE:CCL). Nonetheless, some brave souls are dipping into Carnival stock, despite the obvious headwinds.
From a very-long-term time horizon, buying Carnival shares might make sense. After all, a successful novel coronavirus vaccine will surely be developed and distributed eventually. When that happens, Carnival shareholders should regain some of their losses.
The problem is, though, that there’s no way to predict when that will occur. I wouldn’t want to see anybody take a long position in Carnival stock too early, as it might be dead money for a while.
Complicating matters, too, is the fact that Carnival’s CEO recently made a pronouncement that may convince some traders to load up on shares.
I understand that it’s part of a CEO’s job to be a hype man. But, looking closely at Carnival, the facts don’t really warrant extreme optimism right now.
A Closer Look at Carnival Stock
Is Carnival stock truly a deep value? That’s a question I’m going to explore as we examine the difference between a low price and a real value.
Warren Buffett once famously said, “Price is what you pay, value is what you get.” So, just because a stock price has gone down significantly does not necessarily mean it’s a bargain. Carnival provides a textbook example of this principle.
Sure, the share price is depressed. Carnival stock cost more than $50 back in January. As of Oct. 27, the shares can be owned for less than $14 apiece.
But then again, that’s a measure of the price. In terms of actual value, there’s not much meat on the bone. As evidence of this, Carnival stock’s trailing 12-month earnings per share is -$10.60.
For a stock trading below $14, that’s an unsettling statistic.
Confidence in the Face of Covid-19
According to Barron’s, “at least 3,689 Covid-19 or Covid-like illness cases on cruise ships” have been counted so far (up to Sept. 29) in U.S. waters. Tragically, at least 41 of these resulted in deaths.
This context makes the CDC’s No Sail Order extension through Oct. 31 a little more understandable. After all, safety concerns should be top-of-mind.
Carnival stock bulls, however, may be anticipating that the No Sail restriction will expire for good at the end of October. With this, it’s theoretically possible that cruise operators like Carnival could resume sailing in the U.S. before the year is over. But can we put faith in that prediction?
Carnival CEO Arnold Donald spoke in favor of this notion. In fact, he went full-on bullish, saying, “at this point, we have every reason to be optimistic that we will be sailing in the U.S. before the year-end.”
But I think this is an ambitious forecast. The CEO is jumping the gun.
Not So Fast
The problem with the bullish prediction is that there’s no guarantee the CDC won’t extend the No Sail Order. And even if it does expire, there’s also no telling whether it will be reinstated at a later time.
Furthermore — with an effective vaccine not yet available to the public — the demand for cruises is more than likely lacking. Investors can’t expect people to forget all of the deaths that occurred on cruise ships earlier this year.
Even beyond all of that, Macquarie Research analysts Paul Golding and Charles Yu cited the risk of a second Covid-19 wave as another potential problem for cruise lines. I agree that this is a legitimate and ongoing concern.
Finally, Golding and Yu note that there’s “balance sheet risk” as well as “a fluid political climate.” Put more simply, there’s the possibility that former President Joe Biden might be tough on the cruise line industry as we navigate the pandemic — that is, if he cinches the election this November.
Bottom Line
The Carnival CEO is doing a terrific job as a hype man, don’t get me wrong. But I don’t think you should let his confidence inform your investing strategy.
It is possible that Carnival’s cruise ships might sail this year, but there’s certainly no guarantee. What’s more, this is especially true if the many pandemic-derived headwinds persist. Therefore, it’s probably best to adopt a wait-and-watch policy when it comes to Carnival stock.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.