The stock market can move in different directions, often based on the latest news events. For example, many technology stocks have brutally sold off on reports of potentially rising interest rates, while many value stocks, including those beaten up during the pandemic, have gotten red-hot over the past month.
But while it might feel safe to buy what keeps going up each day, the market can change directions quickly and shouldn't be relied on to determine what's a good investment. For instance, these three stocks are up nicely over the past month but don't have the fundamentals to keep up this performance for long.
Image source: Getty Images.
1. Carnival
The cruise line industry matches up poorly against the omicron variant. A cruise ship is a vessel that puts a lot of people in close quarters with each other, exacerbating the potential for spreading an infectious, and sometimes deadly, respiratory virus.
But cruises are fun, and as more vaccinations are administered through the population, companies like Carnival (CCL 1.13%) have started to see some life. In Carnival's fourth-quarter 2021 (ending Nov. 30), customer deposits were said to have grown for three straight quarters, hitting $3.5 billion. Passenger occupancy rose from 54% in Q3 2021 to 58% in Q4 and management signaled that 2022 could see continued improvement.
This momentum, along with a shift toward value stocks in the broader market, could explain the stock's recent price action; share prices are up more than 20% in just the past month or so. However, look closer at the chart below.
CCL Revenue (TTM) data by YCharts
Carnival has borrowed a ton of money to stay afloat throughout the pandemic, inflating the company's enterprise value to above its pre-pandemic valuation. The stock is not cheap, even though the share price is down.
Meanwhile, the business is burning cash, evidenced by its negative free cash flow. To top it off, the CDC recently discouraged cruise travel because of the omicron variant.
2. Norwegian Cruise Line Holdings
Fellow cruise line company Norwegian Cruise Line Holdings (NCLH -0.21%) tells a similar and unfortunate story. Like Carnival, Norwegian has had to aggressively borrow money to help it stay afloat, pushing the business's enterprise value higher than before the pandemic.
NCLH Revenue (TTM) data by YCharts
The company is burning cash, but Norwegian's weaker balance sheet could have it in an even deeper financial hole. Its debt-to-capital ratio expresses its total debt compared to its overall capital. In other words, it measures leverage and determines how a business is funding itself. With a ratio of 81%, nearly all of Norwegian's capital is coming from debt, which could put the company in danger if it continues getting worse.
Norwegian shares have risen 18% this month, but the business is unhealthy as long as it keeps losing money, burning $275 million per month in 2021 Q3. The company is preparing to resume operations, estimating that it will lose $350 million per month in Q4 as it revamps the business. Still, if omicron depresses travel demand, it could put Norwegian in a problematic situation.
3. American Airlines Group
Airlines have dealt with similar challenges as cruise lines, but air travel is a more diversified industry used for vacations, business, and long-distance trips. Airlines are a tricky business; it costs a lot of money to fuel, maintain, and operate planes, whether they fly empty or full.
Lower air travel has hurt American Airlines (AAL 1.51%) over the past couple of years. The company was virtually rescued from bankruptcy in 2021, taking government relief loans when passenger traffic plunged almost to zero.
AAL Debt To Capital (Quarterly) data by YCharts
But even though American Airlines has managed to survive thus far, that doesn't mean the business is a wise investment. According to TSA records, passenger traffic is at roughly 70% of 2019 levels, which hurts American's profitability because it must fly at less than total capacity. And just like Carnival and Norwegian, debt has pushed the enterprise value above 2019 levels.
Meanwhile, the balance sheet is highly leveraged. As the chart demonstrates, its debt-to-capital ratio is at 124%, and American is still losing money. The stock price may be up 12% over the past month and 21% over the past year, but American Airlines could be a very risky stock until its financials improve.
