Cruise line companies were upgraded by Barclays ahead of a potential opening of the sector. However, the industry is still a huge risk.
On paper, the idea of upgrading shares now doesn’t sound too crazy. There’s currently a “no-sail” order for the industry that may get lifted next week. Should that happen, the cruise lines could open up for business again.
From an investment perspective, buying during periods of uncertainty tends to mean buying at a reasonable price. It’s when investors feel “certain” about a stock that it’s likely overpriced as a result.
However, looking at one travel industry that is open, the airlines, it’s clear that cruise companies face an uphill battle. The latest TSA travel numbers show that air travel is about one-third to one-fourth of its levels from a year ago.
That’s a segment of the travel industry that involves both required trips and leisure, whereas a cruise is all about leisure.
Meanwhile, the cruise industry is touting surveys of customers showing they’re still interested in taking a cruise. There’s undoubtedly some pent-up demand from those who usually make a cruise a key part of their vacation experience, but overall bookings are still looking down as potential first-time cruisers look towards other vacation options.
All these factors make the Barclays upgrade of the sector baffling.
There’s only one reason to buy the sector, and it’s one that Barclays doesn’t touch. It’s the fact that cruise lines, while solidly off their March lows, have lagged the overall stock market by a considerable MARGIN.
Shares of Carnival Corporation (CCL), for instance, are down about 75% over the past year. The S&P 500 is up just under 10%, even after accounting for its recent decline this month. Year-to-date, stocks are flat and CCL is down 71%. That’s a huge underperformance that attracts investors looking for relative value, and could be a catalyst for higher prices.
The cruise line industry may recover. But first, it has to open. And once it does open, it can’t become the hotbed of a viral outbreak. If those conditions are met, the sector will absolutely take off.
It’s still too early for investors to buy into the sector. Barclays knows better. There’s still too much uncertainty, and even clearing ships to operate now won’t do anything to allay potential bankruptcy fears. The so-called “inflection point” is just one checkpoint among many before investors can safely invest.
Until then, the sector is loaded with companies burning through cash, dealing with a huge debt load, and receiving nearly no income right now. Until the risk of a major bankruptcy in the space is entirely off the table, cruise line stocks are speculation, not an investment.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.
Last modified: September 26, 2020 3:10 PM