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Stock Markets Bounce Back, but Cruise Ship Stocks Start to Write Off 2020

By Dan Caplinger - Updated Aug 12, 2020 at 1:49PM

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Big gains showed up across the entire market.

Wednesday was a good day on Wall Street, with none of the recent divided markets that we've seen frequently over the past few weeks. Enthusiasm about the potential for another coronavirus stimulus package, along with prospects for a viable COVID-19 vaccine, helped give market participants the green light to push ahead with gains. Just before 11 a.m. EDT, the Dow Jones Industrial Average (^DJI 0.06%) was up 295 points to 27,981. The S&P 500 (^GSPC 0.23%) rose 46 points to 3,380, and the Nasdaq Composite (^IXIC 0.00%) leapt 204 points to 10,987.

Yet the mood wasn't positive for every single sector of the market. In particular, for cruise ship stocks, even a more broadly upbeat outlook for the overall economy hasn't made it clear whether ships will be able to set sail anytime soon. In fact, it looks like some operators are essentially giving up on 2020 and hoping they can start 2021 off on the right foot.

More cancellations for cruises

The stock performance for companies across the cruise industry was downbeat Wednesday. Carnival (CCL -1.04%) shares were down 5%, while Royal Caribbean Cruises (RCL -0.12%) matched the 5% decline and Norwegian Cruise Line Holdings (NCLH 0.07%) fell 4%.

Cruise ship just off the coast, with a beach nearby and a wooded island.

Image source: Getty Images.

Of note today, a second Carnival-owned cruise line, Holland America, has said that it won't try to launch any sailings of its vessels before mid-December. Princess Cruises had said earlier it would defer all voyages until Dec. 15.

Other companies haven't yet pulled the trigger on further delays. Yet even waiting until November, which is the current strategy for Royal Caribbean and Norwegian, comes with huge financial costs. Fixed expenses continue to burn cash from cruise ship operators' balance sheets, and the longer the companies wait to reopen, the more they'll have to rely on outside financing to stay afloat.

More money

So far, though, investors have been willing to pony up. Royal Caribbean's shares actually spiked higher briefly before the market opened Wednesday morning on news that it had secured a $700 million term loan from Morgan Stanley. The one-year loan carries an interest rate 3.75 percentage points above the standard short-term benchmark interest rate, and while that's fairly expensive, it's not as bad as rates on some of the longer-term financing cruise ship operators have found recently.

Nevertheless, there's likely a limit to how far investors will go to support cruise ship stocks. One ominous sign is that passengers have been less willing to accept credits toward future cruises when current cruises get canceled, instead asking for cash refunds back in their pockets. That will result in cruise lines having less cash on their balance sheets, which in turn could reduce willingness among would-be lenders to allow further borrowing.

To be fair, today's drop in cruise lines follows healthy returns earlier this week. In that context, a pullback seems reasonable. Yet there are also continuing fundamental challenges that could prevent cruise operators from bouncing back the way shareholders currently hope. If Carnival, Norwegian, and Royal Caribbean can't get back to sea soon, their stocks might never fully recover -- no matter how well the broader stock market does.

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

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Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
$41.81 (-0.12%) $0.05
Carnival Corporation Stock Quote
Carnival Corporation
$10.45 (-1.04%) $0.11
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
$13.81 (0.07%) $0.01
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,999.04 (0.06%) $18.72
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,283.74 (0.23%) $9.70
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$12,938.12 (0.00%) $0.00

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

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