Many top performers in the stock market for the first half of this year were exactly what you would expect, if you’ve been following the news.
Big tech companies were well represented at the front of the pack, led by Nvidia NVDA-Q, which makes computer chips that power artificial-intelligence programs. It was followed closely by Meta META-Q, the Facebook owner, which has been promoting its own AI prowess. Tesla TSLA-Q, the electric-vehicle champion, wasn’t far behind.
But what were cruise ships doing near the very pinnacle of the stock-market listings?
At midyear, three of the big cruise companies – Carnival CCL-N, Royal Caribbean Group RCL-N and Norwegian Cruise Line Holdings NCLH-N – were among the top 10 stocks in the S&P 500.
Consider that only three years ago, in the first months of the coronavirus pandemic, all cruise lines suspended operations and that, in the ensuing months, the shares of publicly traded cruise companies were devastated.
Now, with fears of contagion ebbing and pent-up demand for pleasure trips being unleashed, cruise lines have had a remarkable change of fortune.
Inconsistent returns
Each of the cruise-line stocks had astonishing gains for the first six months of the year, but they are still down significantly from the start of 2020.
Here are their returns, according to FactSet:
- Carnival, up 134 per cent for the first six months of 2023 but down 63 per cent since the start of 2020.
- Royal Caribbean Group, up 110 per cent in the first half of 2023 but down 22 per cent since 2020.
- Norwegian Cruise Line, up 78 per cent in the first half of 2023 but down 63 per cent since 2020.
Returns like these might be puzzling if you were unaware of what happened on the planet in the past three years. But factor in the pandemic and the subsequent economic recovery, and the cruise-line stock and bond performance tracks nicely.
It’s part of a larger pattern.
Just as cruise lines have begun to come into their own, a series of companies that prospered during the pandemic are laggards now. Peloton, Zoom and Etsy are trailing in this year’s stock-market performance derby. And major pharmaceutical companies, such as Moderna and Pfizer, whose shares took off when the firms were providing scarce and desperately needed vaccines against COVID-19, are among the poorest performers in the S&P 500.
The pandemic
Briefly put, it wasn’t until December, 2019, that the first reports of the emergence of a novel coronavirus began to emanate out of China – and late in January, 2020, that the World Health Organization declared that a pandemic was under way. Cruise lines began cancelling port calls in China.
In January, 2020, the Diamond Princess, a luxury ship owned by Carnival, began an ill-fated journey in Yokohama, Japan. More than 3,700 passengers and crew members were stranded on board for weeks, with little information about the pandemic.
But the virus spread relentlessly, and more than 700 people ultimately tested positive. In those early days of the pandemic, when people lacked natural immunity against the disease, and effective treatment and vaccines were not yet widely available, nine passengers died.
All major cruise lines suspended operations, as passengers cancelled their bookings en masse. It became evident that a cruise ship wasn’t an ideal place to be in the middle of a pandemic.
In the stock market, cruise-line shares plummeted as 2020 wore on. In that pandemic year, Carnival fell 57 per cent, Royal Caribbean 44 per cent, and Norwegian 56 per cent. The companies had virtually no revenue and mounting debt, and their ability to remain going concerns was in doubt. They survived by taking on enormous debt loads and paying sky-high junk-bond yields, which were needed to attract investors.
The joyful atmosphere needed for a successful vacation at sea seemed unattainable.
An incipient recovery
It was only in 2022 that their finances – and share prices – stabilized, and only this year that they have begun to report sufficient earnings and cash flow to show signs of paring down their debt and returning to steady profit-making operations. In a conversation with stock analysts after reporting earnings in late June, Josh Weinstein, the CEO of Carnival, said the company’s business volume was approaching 2019 levels for the first time since the start of the pandemic and, in some metrics, beginning to exceed it.
According to a transcript of the same session, David Bernstein, the company’s chief financial officer, said Carnival was pouring cash into debt reduction, “driving more than $8-billion in total debt reduction through 2026,” down from a US$35-billion peak early in 2023.
These debt payments, combined with increased revenues, should enable the company to “approach investment grade” in its bond ratings in 2026, Mr. Bernstein said. Because of Carnival’s improving financial picture, the yields on the company’s debt have been declining and the price of its bonds, which move in the opposite direction, have risen.
The specifics of each company matter, of course. What the cruise lines have in common is that all have heightened safety procedures aimed at stemming the spread of any future outbreaks on board, commissioned new ships, taken measures to cut costs and embarked on fresh marketing campaigns. Wall Street analysts, including those at JPMorgan Chase, Bank of America and Jefferies, have given them high grades and helped to drive up their share prices.
Perhaps the magic of sea cruises is back. Certainly no one needs a recurrence of the dismal events of 2020.
In prepandemic times, I took a couple of lovely cruises. On one trip, three generations of my extended family were able to see the world together, while participating separately in age-appropriate recreation – on board, in the water and on land. So I’m personally pleased by the beginnings of a sea-cruise renaissance, although not ready to sail again quite yet.
As an investor, I see the stock performance of the cruise lines this year less as a question of whether this is an opportune time to buy their shares and more as an affirmation of the ever-present need to diversify. What may seem safe today could easily become hazardous tomorrow.
Harry Markowitz, a Nobel laureate in economics who died last month, transformed modern investing with his teachings about how rigorous diversification can reduce risk. A decade ago, during a volatile stretch in the stock market, he told me that ordinary investors would be better off if they forgot about individual stocks and bought broad low-cost stock and bond index funds instead.
Allocate them in a proportion that makes you comfortable and then devote yourself to more pleasant pursuits. Mr. Markowitz convinced me. As for pleasant pursuits, go with what delights you.
That could even be a sea cruise, if you find them fun and, at this stage, safe enough for a carefree voyage.