As the market has bounced back from the omicron scare over the last few days, some of the biggest gainers have been cruise line stocks. In some ways, the jump in the likes of Norwegian Cruise Lines (NCLH), Carnival Corp (CCL), and Royal Caribbean Cruises (RCL) makes sense. NCLH, CCL, and RCL gained 8.2%, 5.5%, and 5.2%, respectively, yesterday alone and are now all close to 20% above their lows of a week or so ago. Momentum is a wonderful thing, but this is one momentum move that investors should be wary of joining, and that traders may even want to consider fading.
The gains make sense because if omicron turns out to cause only mild infection for the vaccinated, as the early evidence seems to indicate it does, then it is logical to take the recovery trade, of which cruise lines have become a major part for traders. Yesterday’s gains came in response to the news from Pfizer (PFE) that their vaccine booster shot affords about the same protection against serious hospitalization and death as two shots do against the original Covid virus. That is undoubtedly good news, and perhaps it makes the idea of joining thousands of others in an enclosed space less scary if you only risk getting sick, rather than dying.
The problem is, though, that that view ignores a couple of things.
The first is what most experts are warning us the rapid spread of omicron and the delta variant before it tells us about the future nature of Covid-19. The likelihood seems to be that we will not defeat the virus completely any time soon but will have learn to live with it and its continuous mutations for some time. Much like with the flu over the last few decades, that will necessitate annual vaccines that target each strain as it emerges. Given the level of misinformation and paranoia around the vaccines now, is it likely that in that scenario, a big enough majority of the global population will take those annual vaccines to make the problem a truly minor one?
At some point, of course, we will no longer be talking about, or particularly worrying about Covid anyway. Such is the nature of people’s attitude to risk. In most cases, it is largely headline dependent. The question is will that point come soon enough for the cruise companies? We are talking about an industry that is by nature capital intensive, and companies that therefore carry large debt loads. Those companies have been losing money and burning cash at an alarming rate for a full year and a half. At the very least, capital raises that dilute existing holdings are a possibility.
The other factor that has to be considered going forward is that even though some people are cruising again, other people have changed their views for good, against going on cruises, due to the events of the last couple of years. I would count myself in this group. I have enjoyed cruises in the past, but the pandemic has changed my thinking to such an extent that I doubt I will ever do so again. Personal feelings are not generally a good basis for investing decisions, but I am sure there are a lot of people who feel the same way. That will lead to a shrunken pool of potential customers and overcapacity in the industry for some time which will mean a significant period of adjustment and rationalization.
This morning’s jobless claims data and other economic statistics suggest that the economy is essentially ignoring omicron and moving on. That is as it should be, and it means that there are lots of opportunities out there in stocks that were sold off in the initial panic. However, it may pay to look outside the cruise industry for those opportunities. That business will still face scares along the way as other variants emerge as well as a long-term change of attitude among potential customers and while there will be periods of optimism that lead to strong rallies here and there, the risk in cruise stocks is just too great to make them appealing, even at these low levels.
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