It's time to hop on board Carnival Cruise
(CCL) as a contrarian play here despite -- or actually because of -- all the negative publicity.
Carnival Cruise stock, of course, is down because of the negative press surrounding the disaster that struck its Triumph cruise ship, which was stranded without power in the Gulf of Mexico. Passengers just landed in Alabama finally after a horrible experience, and this story has been at the top of the news cycle for the past 24 hours.
Of course, Carnival's reputation may get dinged a bit here, and there will be lawsuits. But those risks and events are already priced in, most likely.
The bull case for getting long exposure here is basically four-fold.
First, Carnival looks cheap, relative to its history, as measured by a key valuation metric here, or enterprise value (market cap plus net debt) per available berth day, believes Michael Scanlon, an analyst with the John Hancock Balanced Fund (MUTF:SVBAX). It is currently at $525, compared to almost $1,000 in 2006.
Second, Scanlon believes ticket pricing should improve because cruise companies are limiting capacity expansion over the next few years. And a lot more boomers, the key cruise demographic, are moving into retirement.
Third, a look back at CCL ship disasters shows that the stock tends to do well in the weeks and months that follow the initial knee-jerk sell reaction. It gained about 15% following the Costa Concordia disaster off the coast of Italy in early 2012. The stock gained 15% following the sell-off after another disaster in November 2010 involving a cruise ship called the Splendor. No guarantees for a repeat, of course, but this is the pattern.
Finally, I believe the economy will likely continue to improve. And as consumers and investors get more comfortable with this concept, they will spend more, and invest more in discretionary consumer names like Carnival Cruise.
Consider buying the stock as a medium-term play, meaning one to three years, though market outperformance over the next few months is also likely. And consider shorting the March $36 Carnival Cruise puts, which recently traded for .70 x .75 a contract, and the March $35 puts which sell for .45 x .50.
One risk here is that another similar event occurs. Another is that a market sell-off may be in the cards, given the overall bullish investor sentiment and negative insider sentiment. In any down market, a somewhat troubled name like Carnival will possibly be hit harder. Plus cruise vacations are viewed as a discretionary purchase, so if the market is weak because of surprisingly bad economic news, this kind of name may likely sink further.
As always, with put shorting, be careful not to short more than what your account can handle if the stock eventually does get put to you. Shorting puts here is a way to generate a bit of income, or get a lower entry into a long position, should the stock decline more.
Editor's Note: Michael Brush is the editor of the stock newsletter Brush Up on Stocks and a weekly market columnist for MSN Money.
No positions in stocks mentioned.
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