Cruise Liner Stocks Analysis:
While it might seem a world away from the performance of FAANG stocks or individual winners like Nvidia, cruise liner stocks soared in 2023. Top companies like Royal Caribbean (RCL) and Carnival (CCL) saw triple-digit gains across the year, almost getting back to pre-pandemic levels. In fact, in H1 2023, those two joined Tesla, Nvidia, and Meta as the five biggest gaining stocks on the S&P 500, and they remained among the big gainers until EOY. Others, such as Norwegian, saw healthy double-digit gains.
RCL Stock has almost reclaimed pre-pandemic levels.
We can learn a lot from the performance of these stocks in 2023, and it goes well beyond individual performance.
First, let’s look at the two key reasons why cruise liner stocks did well in 2023:
The post-pandemic bounce. As you might expect, the gains in 2023 were more of a recovery, as the cruise industry was decimated across 2020 and 2021 while also suffering a hangover in 2022. Investors picked up bargains as stocks of companies more impacted by the pandemic than any other in the leisure and tourism sector.
The resilient spenders. One reason stocks soared was due to consumer spending. Cruise vacation purchases defied expectations of a downturn, even in light of pressures caused by high inflation and rising interest rates. As with other industries, consumers were more resilient than first thought. Now, it is also worth pointing out that cruise bookings were like a coiled spring, with pent-up demand from 2020-2022, so it wasn’t only about consumer spending.
Nonetheless, we can see that there was a strong narrative around cruise liner stocks last year. Moreover, the narrative was somewhat predictable. Sure, there could have been other black swan events, including new coronavirus restrictions, but, at the very least, the argument for a rise in the value of cruise liner stocks was a compelling one.
Of course, the post-pandemic trade works both ways. And, just as Royal Caribbean and Carnival were among the top gainers of 2023, a handful of “pandemic darlings” were among the losers. For instance, Pfizer (PFE) and Moderna (MRNA) were placed among the five worst-performing stocks of 2023.
Trading a Narrative
There were, of course, other leisure and tourism stock market plays beyond cruise liners in 2023. Indeed, those who know how to trade indices may have been better served by focusing on broader areas in that sector. For example, the Dow Jones U.S. Travel & Leisure Index had a barnstorming run in Q4 2023. Yet, the point still stands that there was an element of predictability in cruise liner stocks heading into 2023. The narrative of the post-pandemic bounce back was plain to see for investors.
But now, as we race through 2024, where is the narrative on cruise liner stocks? A large number of financial publications have predicted that 2024 will continue to be positive for these stocks. Yahoo Finance picked out Royal Caribbean, Carnival, and Norwegian as three to watch in 2024, claiming that the year ahead offered “Plain Sailing” for cruise liner stocks. Markets Insider from Business Insider also published a September 2023 article reporting how 2024 and 2025 could be “Exceptional” for the cruise liner industry. The Motley Fool went even bigger, publishing an article titled “3 Reasons Carnival Stock Could Double Again in 2024.”.
So, what are the narratives here?
Fundamentals. Bookings are soaring, even eclipsing pre-pandemic levels for some cruise companies. One report showed that worldwide booking projections for 2024 had already reached 35.7 million – up 6% from 2019. As an aside, it should be noted that cruise bookings have been buoyed by price competition in the broader tourism sector. The rise in hotel prices globally has been cited as a contributing factor to cruise bookings.
An industry refresh. The cruise industry has had several existential crises in recent years, not only in relation to COVID-19. The upshot is that there have been several changes to the industry, including smaller expedition cruises, shorter itineraries, initiatives to attract younger passengers, and so on.
The continued post-pandemic bounce. It can be difficult to quantify, but the post-pandemic travel bounce goes beyond 2023. Surveys, including a significant one carried out by YouGov, found that a significant number of people prioritize “seeing the world” post-COVID.
What Could Go Wrong?
While it’s entirely possible that cruise stocks could have a stellar 2024, we would stop short of the “Plain Sailing” predictions. There are simply too many variables that could impact the sector. These include:
Geopolitical factors. There are many global issues, particularly related to conflict, that could escalate in 2024. For instance, in January 2024, we have witnessed Houthi militants attacking cargo ships in the Red Sea, forcing many merchant ships to reroute away from the Suez Canal and take the longer route around the continent of Africa. While cruise ships have not been specifically targeted, the industry is monitoring the situation.
Global recession. As mentioned earlier, consumers were highly resilient in 2023. Many financial forecasters have scaled back their predictions of a global recession, but it certainly should not be ruled out. In Goldman Sach’s macro-outlook for 2024, the firm has put a US recession at a 15% chance. Unlikely, then, but not impossible.
A changing narrative. Lastly, we come to one of the more difficult areas to quantify, but one that remains eminently important for traders. There were great fundamentals for the cruise liner industry in 2023, but they were also supported by the narrative of the post-pandemic bounce. That narrative may recede in 2024 as traders move on to something else.
Conclusion: A Predictable Trend – But for How Long
Nothing is certain in finance, but the rebound in cruise liner stocks in 2023 was one of the more predictable plays. The reverse was true for stocks like Moderna and Pfizer, while other pandemic darlings, although some, like Zoom Inc. (ZM), had their reversals much earlier. Nonetheless, the bounceback narrative will inevitably recede – it’s just a question of when and by how much. At the time of writing, Royal Caribbean, the world’s second largest cruise company, has almost regained its 2019 level, when it reached its all-time high. While Carnival has a way to go, the question for traders and investors will be: Where does the industry go from here? Perhaps there is room for big gains in 2024, but there is no guarantee that it will be plain sailing.