Volatility continues to be the name of the game for cruise line stocks in May, and Thursday's trading is no different. Today, the catalyst for shares surging was a Credit Suisse analyst initiating relatively positive coverage on cruise line stocks.
Shares of Norwegian Cruise Line (NCLH 2.97%) jumped as much as 12.3%, Royal Caribbean (RCL 1.95%) was up 10.7% early in trading, and Carnival (CCL 4.39%) rose 6.9%. Shares of the three companies were up 10.3%, 8%, and 4.8% respectively as of 12:40 p.m. EDT.
Cruise line stocks have generally been moving higher this week on optimism that the economy is going to get better and, by extension, cruises will resume operation sometime in 2020. Companies are starting to take reservations for August and laying out plans to launch ships in a phased manner. On top of the operational optimism, all three of these companies have raised funds that should allow them to remain solvent for multiple quarters, if not years, without customers. That's the long-term picture, but it's not what's driving shares today.
What got investors excited in the short term was Credit Suisse analyst Benjamin Chaiken initiating coverage on the industry with a relatively bullish outlook. He initiated Norwegian Cruise Line with an outperform rating and a $21 price target, Royal Caribbean with an outperform rating and a $67 price target, and Carnival with a $12 price target and a neutral rating. Given the price targets, it's understandable why Chaiken is more bullish on Norwegian Cruise Line and Royal Caribbean, with their current prices around $14 and $44 per share, respectively.
The short-term driver of cruise line shares isn't something I would put much energy into as an investor. Analyst upgrades or downgrades can move stocks in the short term, but long-term business fundamentals and consumer spending are what will drive a recovery in the cruise line business.
What investors should be cautious about is the early customers eager to cruise again in late summer or fall being followed by a very skeptical market in 2021. Travel is likely to be down across the globe for the foreseeable future and while there are cruise diehards, it's the marginal customer that's going to drive profitability for the growing fleet of cruise liners in operation. It's this long-term risk that will keep me from investing in cruise line stocks today. I simply don't think the business will return to what it was in the next few years, and we may be in for years of disappointing earnings and cash flows as a result.