What a difference a single month can make. When I last wrote about the tourism companies Carnival (LSE: CCL) and TUI, their share prices were on a tear. But they’ve fallen sharply since, CCL in particular. It’s down a whole 37% in less than a month.
Why the CCL share price fell
It’s not surprising, though. Even last month, there just wasn’t enough going for the CCL stock to justify its recovery. I think three developments drove it. One, the overall FTSE 100 index was rising. As the lockdowns started easing – or at least their potential easing looked like a reality in the near term – a relief rally was underway. This drove up prices of all stocks, and the CCL share price was no exception.
Two, CCL is a cyclical stock, which means it’s susceptible to higher volatility than defensive stocks. So, as the FTSE 100 index rose, the CCL stock price reacted even more. Third, CCL was among the most beaten down stocks because it was directly in the line of lockdown-fire. It follows that it had most to gain as global health conditions started to improve.
Has it fallen enough to be a buy?
But the global health and economic situation looks less sure now, as news points to a rise in coronavirus cases. The FTSE 100 index itself has corrected by 4.5% in less than a month and the CCL share price has corrected far more. It’s now among the cheapest FTSE 100 stocks, with a price-to-earnings (P/E) ratio at a low 3.6 times. The question for investors now is whether the CCL share price is low enough to make the share a buy.
I think for those investors who saw merit in the stock even earlier, it looks like a far more attractive proposition now. The CCL share price is now 73% below the highest levels seen during 2020. Even the 37% fall from last month is enough reason to buy its share. But to me, its looks more like a short-term trade than a long-term investment.
For a longer duration investment, I’m interested in the fundamentals, because that’s really what will drive the Carnival share price over time. On this count, very little has changed. In fact, there’s been disappointing (if expected) news from the company.
Fundamentals have been weakened
For instance, Carnival has extended an operational pause across its cruise lines, in some cases up to the end of September. As a result, around half the year’s business in 2020 has been lost because of Covid-19. Carnival also released its financial update, which showed the extent of damage so far.
Besides poor financial results, the company’s bracing for challenging times ahead. It says that “World events impacting the ability or desire of people to travel may lead to a decline in demand for cruises”. I read that to mean that both health concerns and a recessionary economy will affect demand.
This scenario could last a while. I expect the Carnival share price to be impacted as a result. I think there are more predictable and better performing FTSE 100 stocks available to the long-term investor right now.