A bull market isn't here yet. But it's never too early to prepare.
The three major indexes all touched bear territory last year as rising inflation and general economic woes shook the market. But these economic problems won't last forever. When they ease, many stocks should be ripe for recovery.
What should we do now to prepare for the next bull market? Invest in stocks that suffered last year -- but still hold potential to grow over time. Let's consider two entertainment giants that may fit the bill. I'm talking about Disney (DIS 0.18%) and Carnival (CCL 1.49%). They fell 43% and 59%, respectively, in 2022, but have each rallied so far this year.
Which makes a better buy before the next bull market? Read on.
The case for Disney
Disney's streaming services have been going strong when it comes to adding subscribers. In the last fiscal year, the company added 57 million subscribers to total more than 235 million.
But the push to grow quickly came at a cost. The segment's operating loss widened by 78% in the most recent quarter. As a result, Disney stock plummeted last year.
However, things are looking up for Disney. Long-time chief executive officer Bob Iger is back in the driver's seat. He returned from retirement to set Disney back on track. On the agenda are cost cuts across the business and an effort to favor profitability over streaming service subscriber growth.
During his previous tenure, Iger led some big moves for Disney -- such as the acquisition of Marvel and the launch of major films like Frozen. And the company's share price climbed. So there are reasons to be confident about his performance this time around.
Meanwhile, Disney can count on growth at its parks, experiences, and products segment -- which traditionally has driven revenue at the company. In the most recent quarter, that segment's operating income climbed 25% to more than $3 billion -- even as the parks limited capacity around the holidays.
The combination of Iger's work and ongoing success in the parks business could equal strength heading into a bull market.
The case for Carnival
Carnival shares sank last year as investors worried about a couple of things. First, Carnival's debt level has soared since the earlier days of the pandemic. The world's biggest cruise operator had to take on more and more debt after halting sailings during those initial months of the health crisis.
The concern now is higher interest rates will add to Carnival's borrowing costs. That's a significant headwind for the company. At the same time, investors worry these difficult times may weigh on travelers' budgets -- and hurt demand for cruises.
So far, Carnival has managed to at least ease this second concern. Booking volumes in the fourth quarter for sailings this year approached 2019's strong levels. And November booking volumes even topped those for the same month back in 2019.
Customer deposits reached a fourth-quarter high of $5.1 billion. And revenue of $3.8 billion in the quarter was 80% of 2019 levels.
Carnival is working toward profitability, with a forecast of at least $250 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter of 2023. Still, losses are far from over. Carnival predicts an adjusted net loss for the quarter of $750 million to $850 million.
At the same time, Carnival shares are trading close to record lows in relation to sales.
CCL PS Ratio data by YCharts
And that price looks very reasonable -- if Carnival can return to profitability.
Will it be Disney magic or fun on the seas?
Both of these stocks have gathered momentum since the start of the year.
Any positive news could continue to push them higher. They also are both sensitive to any potential setbacks in their recovery stories. So the path may be bumpy. But if their recovery stories advance, they both might soar in a bull market.
If I could only buy one of these stocks today, though, I would go for Disney. Carnival's debt level remains a big concern -- and today's environment of rising interest rates may slow down progress toward profitability. That could weigh on the stock, even in the early days of a new bull market.
At Disney, Iger has two years to set things straight before passing the reins to a successor. So, improvements at Disney may come quickly. The stock today is trading at 24 times forward earnings estimates -- down from 40 a year ago. This looks cheap -- and gives Disney plenty of room to run once the next bull market arrives.
