Talk about a missed opportunity.
While many hedge funds have bid up tech and software stocks in an obsessive effort to identify the next AI play, they’ve also managed to avoid the stocks of one of the top-performing industries: Shares of the three publicly traded cruise companies have doubled this year, while another is up 60 percent.
The best performer has been Royal Caribbean Cruises, which is up about 104 percent for the year and has tripled since its July 2022 low. Shares of Carnival Corp., meanwhile, have virtually doubled this year and are up about 150 percent from their October 2022 low.
Norwegian Cruise Line is the “laggard” of the group, up 60 percent for the year and 72 percent from its September 2022 low.
Most hedge funds, however, didn’t hold positions in these stocks, outside of tiny pieces that barely move the performance needle. And they certainly can’t blame Wall Street’s sell-side analysts for not providing good advice. As recently as mid-May, UBS raised its price target on Royal Caribbean from $91 to $103 and hiked its estimates, citing “higher load factors” in the first quarter and higher pricing in each quarter of the year.
Cruise companies were perhaps the last industry to open up following the pandemic. And the Florida law that prevented them from requiring vaccination for customers boarding ships in Florida further prolonged their recovery when they finally did resume sailing.
To stay afloat, all three companies issued a lot of stock, thus diluting the shares — Carnival’s outstanding shares, for example, are nearly double what they were in late 2019. The companies also took on an enormous amount of debt: Norwegian’s net debt has nearly doubled since 2019, Royal Caribbean’s is more than double what it was in 2019, and Carnival’s debt has tripled.
But at the end of last summer, cruise companies began to drop their Covid restrictions, and by fall it appeared that the industry’s devoted customers were becoming much more comfortable sailing on a relatively confined ship with thousands of strangers.
Sure enough, the first-quarter reports confirmed this resurgence.
Royal Caribbean reported first-quarter results that “were significantly better than the company’s guidance,” primarily due to strong close-in bookings at higher prices, the continued strength of onboard spending, and favorable timing of operating costs.
As a result of a record-breaking “wave” season — the period from roughly mid-January to mid-March during which cruise companies offer their best deals — along with accelerating demand for its cruises, Royal Caribbean increased its 2023 adjusted earnings per share guidance. In fact, its load factor was 102 percent, which means that the average stateroom held more than two people.
“We knew that demand for our business was strong and strengthening, but we have been pleasantly surprised with how swiftly demand further accelerated well above historical trends and at higher rates,” said Jason Liberty, president and chief executive officer of Royal Caribbean Group, in a press release. “Leisure travel continues to strengthen as consumer spending further shifts toward experiences.”
Norwegian reported that its occupancy was 101.5 percent for the first quarter, while Carnival reported the highest booking volumes for any quarter in its history.
Despite the recent price surge, however, most of the stocks still have a long way to go to return to their January 2020 peak, which coincided with the first news reports of the virus.
Of all three companies, Royal Caribbean is in the best shape. At around $101 a share, it is down about 25 percent from its January 2020 all-time high.
At nearly $16 a share, Carnival is still down nearly 90 percent from its high of $52, while Norwegian is down about two-thirds from its all-time high of roughly $60.
As for whether any hedge funds made some sort of new commitment to board these stocks in the second quarter, we won’t know until mid-August, when the next round of 13F quarterly filings is made public.
