Many of the top performers in the stock market in the first half of this year are exactly what you’d expect, if you follow the news.
Big tech companies were well represented at the front of the pack, led by Nvidia, which makes the computer chips that power artificial intelligence programs. It was closely followed by Facebook owner Meta, which is promoting its own AI capabilities. Tesla, the electric car champion, wasn’t far behind.
But what were cruise ships doing near the top of the stock market charts?
At the midpoint, three major cruise companies — Carnival, Royal Caribbean Group and Norwegian Cruise Line Holdings — were among the S&P 500’s top 10 stocks.
Consider that just three years ago, in the first months of the coronavirus pandemic, all cruise lines suspended operations, and in the months that followed, shares of publicly traded cruise companies were decimated.
Now, with fears of a contagious decline and pent-up demand for pleasure travel unfolding, the fortunes of cruise lines have taken a significant turn.
Asymmetric returns
Every cruise line stock had impressive gains for the first six months of the year, but they’re still down significantly since the start of 2020.
Here are their returns, according to FactSet:
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Carnival, grew 134 percent in the first six months of 2023 but fell 63 percent since the start of 2020.
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Royal Caribbean Group, rose 110 percent in the first half of 2023 but fell 22 percent from 2020.
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Norwegian Cruise Line, rose 78 percent in the first half of 2023 but fell 63 percent from 2020.
Such returns can be confusing if you are not unaware of what has happened on this planet in the last three years. But the pandemic and subsequent economic recovery factor in and cruise line stock and bond performance track nicely.
This is part of a larger pattern.
Just as cruise lines are starting to come into their own, a series of companies that prospered during the pandemic are now lagging behind. Peloton, Zoom and Etsy are the laggards in this year’s stock market performance derby. And big pharmaceutical companies, such as Moderna and Pfizer, whose shares were shut down when their companies were delivering scarce and desperately needed vaccines against Covid-19, are among the S&P 500’s poorest performers.
Epidemic
To recap, it wasn’t until December 2019 that the first reports of a novel coronavirus outbreak began to emerge from China – and in January 2020 the World Health Organization announced that a pandemic was underway. Cruise lines have begun canceling port calls in China.
In January 2020, Diamond PrincessA luxury ship owned by Carnival, embarked on an ill-fated voyage to Yokohama, Japan. More than 3,700 passengers and crew members were stranded on the ship for weeks with little information about the epidemic.
But the virus spread relentlessly and More than 700 People eventually test positive. In those early days of the epidemic, when humans had no natural immunity to the disease, and effective treatments and vaccines were not yet widely available, nine passengers died.
All major cruise lines suspended operations, as passengers canceled their bookings en masse. It became clear that a cruise ship was not an ideal place to be in the middle of a pandemic.
In the stock market, cruise line shares have declined to wear in 2020. During that pandemic year, Carnival dropped 57 percent, Royal Caribbean 44 percent and Norwegian 56 percent. The companies had virtually no revenue and mounting debt and their ability to remain a going concern was in doubt. They carried heavy debt loads and survived by paying sky-high junk-bond yields, which were needed to attract investors.
The blissful atmosphere necessary for a successful vacation at sea seemed unattainable.
A preliminary recovery
It was only in 2022 that their finances — and share price — stabilized, and only this year did they start reporting enough earnings and cash flow to show signs of reducing their debt and returning to steady profit-making operations. In a conversation with stock analysts after reporting earnings in late June, Carnival Chief Executive Josh Weinstein said the company’s business volume had reached 2019 levels for the first time since the pandemic began and was beginning to surpass it in some metrics. it is
According to a transcript of the same session, the company’s chief financial officer, David Bernstein, said Carnival is pouring cash into debt reduction, “driving more than $8 billion in total debt reduction by 2026,” down from a peak of $35 billion in early 2023. .
That debt repayment, combined with increased revenue, should enable the company to “approach investment grade” in its bond rating in 2026, Mr. Bernstein said. As Carnival’s financial picture improved, the company’s debt yields fell and its bond prices, which move in the opposite direction, rose.
The specifics of each company are of course important. What cruise lines have in common is that all have stepped up safety measures, launched new ships, taken measures to cut costs and launched new marketing campaigns aimed at preventing the spread of future outbreaks on board. Wall Street analysts including JPMorgan Chase, Bank of America and Jefferies gave them high grades and helped boost their share prices.
Perhaps the magic of sea travel is back. Certainly there is no need for a repeat of the disappointing events of 2020.
In pre-pandemic times, I took a few nice cruises. On one trip, three generations of my extended family were able to see the world together, while separately participating in age-appropriate entertainment—on board, on the water, and on land. So I’m personally pleased by the start of an ocean cruise renaissance, though not yet ready to set sail again.
As an investor, I’m looking at cruise lines’ stock performance this year less as a question of whether it’s a good time to buy their shares and more as a recognition of the ever-present need for diversification. What may seem safe today can easily become dangerous tomorrow.
Harry Markowitz, The Nobel laureate in economics, who died last month, transformed modern investing with his teachings on how strict diversification can reduce risk. A decades ago, During a volatile stock market rally, he told me that ordinary investors would be better off if they forgot about individual stocks and instead bought broad-based low-cost stock and bond index funds.
Allocate them in proportions that make you comfortable and then engage yourself in more pleasurable pursuits. Mr. Markowitz convinced me. For pleasurable pursuits, go with what makes you happy.
It can even be an ocean cruise, if you find them fun and, at this point, safe enough for a carefree voyage.
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2 Comments
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