There are many types of stocks that are suitable for Warren Buffett's portfolio that aren't one of Berkshire Hathaway's holdings. Investors can, however, apply Buffett's way of thinking and methodology to find their own good, deep-value stocks to buy.
One intriguing option right now might be cruise ship operator Carnival (CCL -0.66%). The stock has been surging this year as its financials have improved. But is this a business that Buffett would invest in, given the stock's risk and volatility?
Why Carnival could be a Buffett-type stock
There are multiple boxes that Carnival would likely tick off for the billionaire investor as a possible investment option.
First and foremost is its brand. The company is a leader in the cruise industry and is well known. In addition to Carnival Cruise Line, the company also owns Princess Cruises, Holland America Line, Costa Cruises, and many others. Altogether, it has over 90 ships visiting more than 700 ports. Every year, it hosts about 13 million guests.
Having a strong brand is important to Buffett because it allows a company to create a loyal following among its customers. Many of the top stocks for Berkshire Hathaway feature top brands, including Apple, Kraft Heinz, and American Express.
Another reason Buffett might want to buy the stock today is that Carnival is trading at a fairly low valuation. At only 14 times estimated future profits, it isn't an expensive stock by any means; the S&P 500 averages a forward price-to-earnings multiple of over 20. Before the pandemic, it was comfortably trading above $40, whereas now it struggles to stay above $15.
Carnival's business is in better shape these days with the economy returning to normal and the company now posting profits again. Last quarter, for the period ended Aug. 31, net income totaled slightly less than $1.1 billion on revenue of $6.9 billion, for a strong profit margin of 16%.
Why Carnival might not be a Buffett-type stock
While there are many reasons to buy Carnival, there are also drawbacks that could explain why it's not in Berkshire's portfolio.
The most glaring reason investors might avoid the stock is that it carries high debt. Last quarter, the company reported long-term debt of $29.5 billion. While Carnival has been paying that down, it remains a fairly hefty sum to be carrying, especially at a time when interest rates remain high. That high debt load creates financial risk and could hinder long-term growth opportunities.
Carnival's financials, while they have been improving, also aren't consistent. Predictability in earnings is important for Buffett since it minimizes the overall risk in the business. Over the trailing 12 months, the company has incurred a net loss of $1.6 billion.
The company should be on a better trajectory, but there's still that volatility and risk that come with investing in a travel business that could have Buffett anxious about owning Carnival. As the coronavirus emerged in 2020, for example, Buffett sold all of his airline stocks due to the emerging risk.
Conditions in the travel industry are much more stable today, but there's also the risk of a looming recession next year, which could weigh down demand. The potential for continued volatility in the industry is a reason why Buffett might prefer to steer clear of Carnival.
Is Carnival a stock Buffett would buy?
Overall, Carnival is an investment that could be a good fit in Buffett's portfolio. Although its financials haven't been consistent in recent years, and it has needed to rely on stock offerings, it's hard to blame Carnival, given the state of the travel industry with lockdowns and restrictions holding the business back. For forward-looking investors, there's reason to be optimistic about the company's future, especially given how relatively cheap the stock is today.
Carnival's strong brand, good profit margin, and improving financials are reasons why this can be a solid long-term investment for your portfolio.
