Discounts Won't Save These Fragile Stocks

In 2009, Shirlee Yeary and her husband were ready to give up.

The recession was taking a toll on the Chicago couple, and previous luxuries – like an annual winter vacation – seemed unlikely. They just couldn't risk a large or unnecessary expense in such an uncertain economy.

So when their travel agent suggested an extravagant cruise, Shirlee was shocked.

At the time, cruise line Royal Caribbean Cruises' (RCL) premium segment Celebrity Cruises was offering a steep discount. For $1,100 per person – almost half the usual price – Shirlee and her husband would get a weeklong cruise on a brand-new ship, plus amenities and extras like a private balcony, complimentary champagne, daily hors d'oeuvres, and preferential treatment on shore excursions.

It was such a good deal, they couldn't refuse. So they jumped at the offer.

In a 2009 Time magazine article, Shirlee noted, "It seems they have to [offer some crazy discounts] to keep ships afloat in this scary state of affairs." She was exactly right.

With fears of the new coronavirus running rampant, the dramatic crash we're seeing lately has hit travel and tourism hard... And you might be tempted to think the carnage in cruise stocks is a one-off occurrence.

But that's not the case at all. You see, these fragile stocks are particularly vulnerable to recessions and drops in the stock market. Let me explain...

Cruise ship operators like Royal Caribbean are at their best during a booming economy. People are employed, have access to credit, and feel "wealthy." They're not afraid to spend money on a cruise.

Consumers have less cash to spend in a recession. Businesses earn less and make cuts, unemployment rises, home values and stock portfolios decline... and consumers cut back even further on spending. Nonessentials, like vacations, go out the window for many folks.

Cruise lines can't just park a portion of their fleet and wait out a recession. Whether they're full of passengers or not, ships require expensive maintenance to stay operational. Fuel, insurance, administrative, and payroll expenses hardly budge with a lighter passenger load.

So they lure passengers onboard with steep discounts that are hard to refuse.

During the last recession, a seven-day cruise to Alaska (normally more than $2,000 per person) was going for $499 per person on Holland America and $399 per person on Carnival. A four-day trip from Miami to the Bahamas (normally around $1,000 per person) was going for $200 per person on Norwegian Cruise Lines.

Once the passengers are onboard, the cruise lines nickel-and-dime them with extras like alcohol, specialty restaurants, and gambling. On paper, it sounds like a decent strategy. After all, cruise lines generate almost a third of their sales from onboard spending. And the deals are fantastic for the customers. But it doesn't work.

Even with these massive 75% to 80% booking discounts, onboard traffic fell at least 25% across the industry in 2009. Royal Caribbean's sales fell 10%. That might not sound like much, but it only takes a small decrease in sales to crush its profits... Sure enough, profits fell 75% in that same year.

Cruise ship operators sell off hard in a recession. Royal Caribbean was no exception. By early 2009, its stock had collapsed to just $6 a share, down almost 90% from $44 per share two years prior.

Now, the cycle is repeating itself.

The coronavirus has already hit cruise stocks. Travel restrictions are going up worldwide. Two ships from Carnival (CCL) have been quarantined. And Royal Caribbean has announced it will cancel its U.S. cruises for 30 days. These two stocks have already fallen roughly 75% and 80% from their recent highs, respectively.

Not only that, but with the fallout we'll see from the coronavirus, some economists believe we're headed for recession (if we're not in recession already). That's bad news for cruise stocks.

These fragile businesses will continue to struggle in an economic slowdown. And based on history, deep discounts won't be enough to save their stocks from plummeting.

Good investing,

Bill McGilton

Editor's note: Bill told his newsletter readers to bet against shares of Royal Caribbean in May 2019... And as prices crashed recently, he was able to close the trade for a 227% gain. To learn more about his "portfolio insurance" strategy – and how it could help you protect your wealth with big profits in the months ahead – tune in for our free online event tomorrow night at 8 p.m., Eastern time. You can get the details here.

Further Reading

It's important to be able to pick out companies that are undervalued in times of turmoil. But it's equally important to know which beaten-down stocks are headed toward oblivion. Knowing the difference between the two can make huge gains... Learn more here.

Uncertainty rules the world right now. The markets are in freefall, and people are panicking around the globe. Amidst all this fear, it is more important than ever to stick to your investing strategies and not succumb to emotional investing... Read more here.

Market Notes
AMID THE CORONAVIRUS OUTBREAK, HOMEBUYING IS A LOW PRIORITY

Today’s chart shows another company hit hard by the coronavirus outbreak…

To avoid this deadly new disease, folks across the country are staying home. They’re not going on cruises… They’re not going to restaurants, bars, or movies… And the market is worried they’re not going out to look for new houses, either. We’ve been looking out for some of the biggest victims in this broad sell-off. And this homebuilder has fallen sharply over the past few weeks…

D.R. Horton (DHI) topped the most recent Builder 100 homebuilder ranking, selling more than 52,000 houses in 2018. It’s well-positioned for the long-term bull market in housing that we’ve been tracking in DailyWealth. But for now, the market doesn’t expect many people to go out and buy houses… And if workers fall sick or face quarantines, D.R. Horton might have to pause construction, too.

In response, DHI shares have been cut in half over the past month – plummeting from all-time highs to multiyear lows. We know folks will have to buy homes again someday… But now isn’t the time to get into homebuilder stocks…