The waters were placid in early morning trading on Wednesday. Then, seemingly out of nowhere, shares of Carnival Corporation (CCL 1.01%) (CUK 1.12%), Royal Caribbean (RCL 1.46%), and Norwegian Cruise Line Holdings (NCLH 2.97%) suddenly dropped. Here's how each cruise ship stock fared:
- Carnival Corporation stock was down as much as 6.8%, but closed 3.7% lower.
- Carnival stock was down as much as 6.2%, but closed 3.3% lower.
- Royal Caribbean stock was down as much as 2.4% but closed 0.4% lower.
- Norwegian Cruise Line stock was down as much as 6.9%, but closed 3.3% lower.
The comparable timing and size of the drops for these stocks suggests a single root cause. But before we unpack the issue, it's worth noting that there is company-specific news for Carnival and Royal Caribbean today.
Starting with Carnival (which has two different stocks), news broke that it's postponing cruises yet again. This time, the cruises in question belong to Carnival's Cunard line. Dates vary, but cruises are being pushed back to at least late May and early June. This is in addition to the cruises that are already postponed into September.
Rather than just waste time, Carnival will send three ships to dry dock and perform regular maintenance on them. While it may not be the scheduled time yet, it's better than doing nothing. This will keep ships on the water and out of dry dock once the COVID-19 pandemic has passed and cruising schedules return to normal.
Royal Caribbean had a different idea of how to use its down time. The company launched a "cruise to nowhere" out of Singapore. The idea was to make cruising safe by implementing strict sanitation measures, operating the boat at half capacity, and keeping away from other ports. The ship was just supposed to provide a fun outing and return safe and sound to the same port after a few days.
Except someone reportedly contracted the coronavirus. According to CNN, the ship returned to port and the 83-year-old passenger was taken to the hospital. The crew and other passengers remain quarantined on the ship, awaiting negative test results. This was not what Royal Caribbean hoped for when it approved this cruise.
Here's the thing: Carnival, Royal Caribbean, and Norwegian Cruise Line stocks didn't start falling until the afternoon -- all three were up modestly in the morning. But the negative news from Carnival and Royal Caribbean had come out early in the day, well before the stocks started dropping. If you zoom out and look at major indexes like the Nasdaq Composite and the S&P 500, you'll see these started falling about the same time as the cruise stocks.
Therefore, it's logical to conclude these three stocks aren't actually down because of bad news in the cruise industry. Rather, they're simply down with the market. After all, poor Norwegian Cruise Line fell and it didn't even do anything. I believe today's movement highlights an important issue for investors.
Over the past month, these three stocks have crushed the market -- up between 40% and 64% compared to the market's 4.5% return. These returns are being fueled by emotion and nothing more. Investors are excited that there's an effective coronavirus vaccine on the way. And indeed, that's worth celebrating. But cruise ships still can't operate, and today's news highlights that point.
As long as cruise ship companies are unable to sail freely, they remain cash-burning machines. This affects the intrinsic value of these stocks -- a company with more debt and more shares simply isn't worth what it was before the pandemic started. Furthermore, cruise lines depend upon consumer-discretionary spending -- after all, no one needs to take a cruise. And people won't necessarily be clamoring to climb aboard just because there's a vaccine.
Investing in a cruise ship stock today requires a strong long-term thesis -- a simple expression of how the underlying business can generate positive shareholder returns over the next five years or so. Understand that many people won't share your long-term outlook. They'll emotionally buy and sell for all sorts of reasons (like today) hoping they're lucky enough to be on the right side of the trade.
Early today, Carnival, Royal Caribbean, and Norwegian Cruise Line stocks were trading higher despite some bad news in the cruise industry. To me, that's irrational and not what I would have predicted. Then this afternoon, these stocks dropped simply because the market was down. If you're going to invest in stocks, you're going to have to block out days like this and stick to your investing thesis. Real news can impact your thesis, so it's worth monitoring. But the fickle whims of the market should be ignored while your thesis plays out.