Carnival Cruises Stock Will Reward Patient Investors

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The fears of Covid-19 variants have risen a bit in the past few months. Luckily, experts tell us that the inoculation process is helping control the effects this time. But sentiment is a powerful motivator, so it is natural for investors to act in fear of its headlines. Some equities, like Carnival Cruises (NYSE:CCL) stock fall from fears of a virus spreading.

The pandemic was brutal last year, so being cautious is smart but this brings negative effects on Wall Street.

This, however, remains concentrated and did not slow down the rise of the stock market indices. They are breaking records still, but not for all stocks.

Companies whose businesses rely on social gatherings are sensitive to the reopening process. They need it to go on without hiccups. Headlines of the delta variant hurts their stocks. This bunch includes most travel and leisure companies like this and airlines to name two sectors.

CCL stock stumbled hard from $32 per share, which isn’t that surprising. From a fundamental basis the business is still severely down from normal levels.

Moreover, technically that was about half way rally back from the pandemic low. Stocks often stall there but it’s not usually the end of the recovery. The bulls merely need to rest and build better momentum.

CCL Stock Has More Upside Potential

Source: Charts by TradingView

Investors who bought the bottom have almost a 300% win, and they may book profits. On those resulting dips, fresh investors wanting a piece of that action take the baton. The important technical part is that CCL held $20 per share. In fact, it could have lost $2 more and still be OK.

From here there will be resistance into $28 per share. The focus should be on breaking out from the prior failure at $32. When that happens, the rally will re-ignite and target the February ledge. This would constitute a 35% more upside potential above $32 per share.

However, the first major hurdles lies just above current price. The $24 zone has been pivotal for months. It was a top in December and a base in March. More recently, it is acting as a pivot, so the bulls need to reclaim it as support.

The news is improving from the Carnival team. They recently announced restarting more of their ships. They need more of these headlines to help rebuild their finances. Management so far did its best to survive the global shutdown. The fact that they are still in operation and solvent is a miracle. This stands testament to their abilities to execute even under duress.

Therefore, once they are up and running with near normal capacity they can repair their financial statements. Revenues are off more than 90% from the 2017 run rate, so it is futile to use them. Buying CCL stock now is a bet on the future, not current events. They are still hemorrhaging $9 billion yearly loss. Compare that to a $3 billion net profit coming into the pandemic crisis.

Let’s Be Realistic

The return to normal is going to be a long road. We can draw some expectations from what we’ve seen from airline stocks. The airlines financial statements are much healthier than cruises. For example, United Airlines (NASDAQ:UAL) revenues are about 40% of pre-pandemic levels, and net losses narrowed considerably.

However, one would expect better since travel is almost back to 80% of 2019 traffic based on the TSA data. There are clearly still lingering inefficiencies despite the healthy passenger traffic.

It might turn out to be different for cruises but it’s better to stay realistic. Expecting a quick recovery in CCL stock could lead to irrational decisions.

In July, I was optimistic the stock in general but did suggest booking some profits. What followed was a 25% correction to $20 per share. Those who did that can reload for another run higher.

Overall caution is still necessary. Stock markets have never been higher and going into a Federal Reserve tapering process. This brings the potential of too many new scenarios to navigate.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.