Schaeffer's Trading Floor Blog

Weekly Contrarian: Smooth Sailing Ahead For Carnival (CCL)?

Stats support possible recovery for cruise line operator CCL

by 3/27/2013 12:54 PM
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Carnival Corporation (NYSE:CCL - 33.60) has had a tough go of it lately, between two ships breaking down and stranding passengers amid non-stop news coverage. And to no surprise, CCL shares have retreated since all the bad news broke. But at least one writer appears to think that Carnival may be done taking on water. In a piece called "Carnival's stock may ride out rough seas," USA Today markets reporter Matt Krantz outlined reasons why the cruise operator may still be a solid investment.

"The headlines Carnival is getting lately aren't flattering, but so far, investors don't seem ready to jump in the lifeboats," Krantz writes. "All these problems don't seem to be hurting Carnival stock much. Shares of the company are up more than 6% in the past year and down 8% in 2013." He goes on to cite an analyst report from Credit Suisse, pointing out that the brokerage firm only cut its 2013 earnings estimate by a penny. In addition, Krantz writes that brokerage firm Stifel Nicolaus thinks "the spate of negative news is just a coincidence of bad luck and is creating an interesting situation with the stock." This comes despite the short-term hit to earnings because of cancelled trips due to ship repairs and potential customers scared off by the news.

Another article from Gary A. Warner, travel editor with the Orange County Register, points out that Carnival also has its size and diversification on its side. CCL also operates the Princess, Holland America, and Cunard cruise lines, and while all cruise companies have taken a hit, this helps soften the blow for Carnival. "This seagoing behemoth has 100 ships and 91,000 employees around the globe. It draws 10 million customers a year when its land-based tour operations are added in," Warner writes. "If Carnival Corp. were a navy, it would tie with Britain for the fifth-largest number of ships in the world and its ships are much bigger than the Royal Navy's."

Contrarian Perspective

It is true that all the bad news and soft forecasts have been a drag on CCL shares lately; they are down nearly 9% this year. In fact, Carnival has repeatedly dipped below its lower Bollinger Band during the last month -- and an earnings-related bump was short-lived. Yet from a contrarian point of view, that puts CCL nearly into "oversold" territory. In fact, its 14-day Relative Strength Index stands at 36, which is bordering on the 30 level that generally indicates the stock is oversold. In addition, there are nine analysts with a "hold" rating on the stock, even while CCL has outperformed analysts' earnings expectations in each of the last four quarters. Another positive surprise in spite of lowered expectations could push those analysts off the fence and the stock higher.

As for sentiment on the options trading floor, investors remain slightly bearish on Carnival. The 50-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 1.86, meaning there were nearly two puts being bought to open for every call in the last 50 days. If CCL could surprise investors and move back up, that could force bearish traders to unload their positions, further creating support for the stock.

There are of course a couple of fundamental "ifs" involved with any positive outlook for CCL. If the company can put these incidents behind them. If another ship does not break down. If CCL is able to woo back wary travelers with discounts and goodwill. Yet if all of those scenarios come true, Carnival could indeed be in for the smooth sailing predicted by the USA Today writer.

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