Please ensure Javascript is enabled for purposes of website accessibility

Why Cruise Line Stocks Soared Over 25% Tuesday

By Daniel Miller – Apr 7, 2020 at 5:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After being decimated over the past month, cruise line stocks found some relief today.

What happened

Shares of Royal Caribbean Cruises (RCL -7.91%), Carnival Corporation (CCL -6.82%), and Norwegian Cruise Line (NCLH -5.33%), were all flirting with 30% gains during early Tuesday trading before giving some gains back, as officials announced positive news for the COVID-19 coronavirus outbreak.

So what

In case you missed it, despite a rising death toll in New York, Governor Andrew Cuomo said that the hospitalization rate and new-infection rate were both in decline. Morgan Stanley's chief U.S. equity strategist, Mike Wilson, went as far to say he believes the worst of the market turmoil is behind us and it makes "the risk/reward more attractive today than it's been in years."

^SPX Chart

^SPX data by YCharts.

As consumers practice social distancing and many businesses temporarily close their doors or pause some of their services, many stocks and sectors have been hard hit -- but cruise lines have been decimated. One reason for the cruise line sell off was that the group was left out of the $2 trillion coronavirus stimulus package as it was limited to aiding U.S. incorporated companies with a majority of workers based in the country. That stipulation effectively excluded major cruise line operators, despite President Donald Trump admitting he would like to provide some assistance, as cruise lines support some local U.S. economies.

Cruise ship at sea at night.

Image source: Getty Images.

Without aid, however, the companies are feeling pressure on their balance sheets as they continue to burn cash and have zero revenue. Comments from National Economic Council director Larry Kudlow suggested that stay-at-home orders could be lifted in four to eight weeks, and any news that suggests we're beginning to flatten the COVID-19 outbreak curve or optimism that the economy will rapidly bounce back will send these stocks soaring.

Now what

Analysts at UBS answered the question many investors have asked: "How long can cruise lines last in this environment?" Per analyst, Robin Farley, "CCL's capital raise last week gives it the longest runway of liquidity to stay afloat in a zero-revenue scenario, at about 12-13 months with potential for another 2 months based on prolonged layups, and more beyond that." Farley also believes Royal Caribbean has roughly 10 months of liquidity and Norwegian Cruise Line has roughly seven to eight months in a zero-revenue scenario.

This is a great example of why investors need to check balance sheets, liquidity, and upcoming debt maturities to better understand which companies can weather this storm -- especially if they're considering investing in a risky area such as cruise lines. While broader markets will almost certainly bounce back over time, not all companies will survive this. Companies with strong balance sheets and an intact long-term growth story could be of interest to investors.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
$43.64 (-7.91%) $-3.75
Carnival Corporation Stock Quote
Carnival Corporation
$9.16 (-6.82%) $0.67
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
$13.86 (-5.33%) $0.78
Morgan Stanley Stock Quote
Morgan Stanley
$79.86 (-1.98%) $-1.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.