Insights

Why Cruise Line Stocks Surged Then Sank on Friday

What happened

The major cruise line operators sailed smoothly into Friday’s bear market at first, before getting waterlogged. Carnival (NYSE: CCL), Royal Caribbean Cruises (NYSE: RCL), and Norwegian Cruise Line Holdings (NYSE: NCLH) stock all ended the day down substantially, by nearly 6%, slightly over 7%, and a bit more than 4%, respectively.

So what

At the start of the day, investors got excited about travel and related stocks after a major announcement from the White House. The Biden administration said it will drop the current requirement for international air and cruise line travelers to be tested for COVID before arrival into the U.S.

This decision, based on the latest assessment from the Centers for Disease Control and Prevention (CDC), is effective this coming Sunday just after midnight. The move isn’t permanent; the CDC will reassess its guidance after 90 days, after which it may be reinstated if the pandemic worsens again.

Although testing requirements are usually not deal-breakers for hardcore travelers, it’s likely that others decided against international trips at least partially because of them. Hence the early stock-price gains Carnival, Royal Caribbean, and Norwegian all experienced on Friday before the broader market pessimism brought them all down.

Now what

To coin a catchphrase from a popular waterborne movie from years ago, just when you thought it was safe to get back in the water…

Although tourism is indisputably recovering and might even be set for its best summer season in years (even compared to the pre-pandemic times), cruise line operators remain beset by a host of challenges. They are highly vulnerable to future surges from variants of the resilient coronavirus, and in the meantime have to cope with massive debt loads after their industry was idled for a long stretch.

Carnival, Royal Caribbean, and Norwegian might not have fully deserved the investor punishment they were handed out on Friday, still it’s wise to be cautious and sail carefully in this sector.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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