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What the Heck Happened to Cruise Line Stocks This Week?

By Rick Munarriz – Jun 27, 2020 at 8:10AM

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A credit-rating downgrade and a pair of analyst downgrades rock the cruise line stocks.

It was a rough week for investors in cruise line stocks. Shares of Norwegian Cruise Line Holdings (NCLH -18.04%), Carnival (CCL -23.25%) (CUK -23.01%), and Royal Caribbean (RCL -13.15%) posted double-digit percentage declines. It was a choppy market, sure, but the S&P 500 was limited to a less than 3% slide for the week. Royal Caribbean and Norwegian Cruise Line went on to tumble 16% this week. Market leader Carnival emerged as the relative victor, but there are no bragging rights that come with its 11.5% drop.

It was a perfect storm for the industry. There were a couple of analyst downgrades, a notable credit-rating hit for Carnival, and even Disney (DIS -3.20%) got swept into the malaise of negative industry headlines when a crew member of its Disney Wonder ship died in the repatriation process. Toss in a surge in new COVID-19 cases in Florida, Texas, and California -- three states with essential ports for the cruising industry -- and the fate of Carnival, Royal Caribbean, and Norwegian Cruise Line was sealed. It wasn't going to be a good week for cruise line stock investors. 

Two couples on the beach shore with a cruise ship in the water behind them.

Image source: Getty Images.

The hits keep coming

Momentum was already teetering heading into this week's trading. All three of the cruise lines had delayed future sailings until mid-September, at the earliest, during the prior week, raising more concerns about refund requests and revenue generation that will eat into their liquidity. 

S&P Global Ratings would go on to downgrade Carnival's credit rating to its equivalent of junk status on Tuesday. That was the same day that Disney Wonder painter Eddie Burgos Ragodon of the Philippines died shortly after reportedly visiting the ship's medical center with chills. Results of a COVID-19 test on Ragodon are pending, but it's another painful reminder that there are still tens of thousands of crew members on ships waiting to return home. 

Tuesday was also when Chris Woronka at Deutsche Bank raised his price targets for all three stocks, but that's not as positive as it sounds. Shares of Carnival, Royal Caribbean, and Norwegian Cruise Line were already trading 14% to 33% higher than Woronka's elevated price goals. He was just catching up to the earlier stock gains, but his near-term prognosis is not upbeat. 

On Wednesday, Felicia Hendrix at Barclays downgraded Royal Caribbean and Norwegian Cruise Line from overweight to neutral. With so many uncertainties for the cruising industry and with both stocks already doubling from their springtime lows, the analyst saw better investing opportunities in the lodging and gaming segments of the travel industry. 

The surge in new COVID-19 cases in popular states with heavily trafficked cruise line ports is a near-term concern, and obviously this remains a fluid situation. We're now three months away from the first scheduled sailings, and a lot can happen between now and then.

A new joint travel advisory on Wednesday from New York and neighboring states asking anyone visiting or returning from Florida, Texas, or California to enter into a 14-day self-quarantine will also naturally eat into the cruising industry if that stipulation is still in place when sailings resume. With recession fears also in play, this is a bad time for the travel industry, in general, but for cruise line investors, in particular. 

Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Carnival and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
$94.33 (-3.20%) $-3.12
Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
$37.90 (-13.15%) $-5.74
Carnival Corporation Stock Quote
Carnival Corporation
$7.03 (-23.25%) $-2.13
Carnival Corporation Stock Quote
Carnival Corporation
$6.19 (-23.01%) $-1.85
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
$11.36 (-18.04%) $-2.50

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

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