Why Cruise Ship Stocks Are Lifting the Stock Market Despite This Bad News

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The stock market has been on fire lately, and the upward momentum continued on Tuesday morning after the long holiday weekend. Major market benchmarks continued to climb into record territory, with many investors pointing to ongoing improvement in economic trends and the prospects for a return to more normal conditions. As of shortly before 11 a.m. EST, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 70 points to 31,528. The S&P 500 (SNPINDEX:^GSPC) had risen 6 points to 3,941, and the Nasdaq Composite (NASDAQINDEX:^IXIC) moved higher by 36 points to 14,132.

For much of 2020, many stock market investors focused closely on cruise ship stocks. Yet amid a host of new investing trends that have come up recently, companies like Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Line Holdings (NYSE:NCLH) had faded into the background.

On Tuesday morning, though, interest in those cruise giants perked back up. Even though the industry got some bad news, shareholders seem to think that the wind could be filling the companies’ sails in the near future.

Image source: Getty Images.

Cruisin’ higher

Shares of cruise ship stocks were higher across the board Tuesday morning. Carnival and Royal Caribbean gave shareholders a 6% boost, while Norwegian investors had to settle for about a 4% rise.

The surprising thing about the move higher for the trio was that it came shortly after Norwegian gave some disappointing news. The cruise operator suspended all of its voyages under the Norwegian, Oceania, and Regent Seven Seas brand names through the end of May 2021. That was a month longer than previously stated, and it continued the string of seemingly unending incremental delays that are leaving many would-be passengers without any clue when they’ll be able to return to the seas.

The pain could last a lot longer. Late last month, Carnival suspended some of its sailings all the way until November 2021. The three ships involved will be dry-docked until then, forcing the cancellation of cruise reservations on those particular vessels.

Moreover, sentiment about cruise operators on Wall Street has been increasingly ugly. One stock analyst last week downgraded Carnival from hold to sell, setting a $14 price target that was more than 30% below where the stock traded at the time.

Investors are still hungry

Yet the point in favor of these cruise ship stocks is that investors still seem to be willing to do what it takes to keep them afloat. For instance, Carnival raised $3.5 billion in unsecured debt last week, issuing six-year notes with a coupon rate of 5.75%. It’s the fifth time Carnival has turned to the bond market for help.

Shareholders still have to remember that all this debt will have to get paid off at some point. Cruise line operators could divert cash flow away from potential dividends or stock repurchases to maintain their debt, or they could issue new stock to raise cash to pay down obligations. Either way, it means that future returns for shareholders will be at best diluted from what they otherwise would have been.

Investors have been rooting for cruise line stocks for a year now, and they still are today. Yet the companies’ business prospects look as uncertain as ever, and they might run out of time if they can’t get their ships back to sea soon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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