Going Back Out to Sea with Carnival

It has been six months since I last wrote about cruise ship operator Carnival Corp. (NYSE: CCL). At that time, CCL was trading below $7 and sinking fast. I said then, “The company is fighting for its survival and we should know by next spring if it will be able to avoid bankruptcy.”

Well, spring is here and so is Carnival. Two weeks ago, the company released an update on its 2023 first quarter results. Carnival said that it will report a Q1 net loss of $693 million instead of the $750 to $850 million loss it was originally expecting.

The stock market rejoiced by sending CCL more than 10% higher. On March 31, it crested above $10 before falling back to where it had been trading prior to the earnings announcement. After having a few days to think about it, the sages on Wall Street realized that a nearly $700 million loss isn’t such great news after all.

In fairness to Carnival, its operating metrics are improving. According to the company, “Revenue in the first quarter of 2023 was $4.4 billion, representing 95% of 2019 (pre-COVID) levels.” Also, it “experienced the highest booking volumes for any quarter in its history.”

Carnival’s outlook for 2023 is optimistic. In fact, it said that it expects “Occupancy of 100% or higher.” I’m not sure how that math works, especially since the company is guiding for less than full occupancy during the second quarter.

Regardless, suffice to say that Carnival believes the worst is behind it. Presumably, even the looming threat of an economic recession this summer and a jump in oil prices last week is not enough to dissuade the company from its lofty expectations for 2023.

Swimming Upstream

To my way of thinking, all that optimism in the face of so much adversity creates an investment opportunity. The company is expecting a stellar year for cruising while Wall Street is battening down the hatches.

This isn’t the first time that I felt there was money to be made on Carnival. In fact, it isn’t the second time, either.

In December 2021, I recommended an options trade on Carnival known as a long straddle. That strategy entails buying both a call and a put option that expires on the same day at the same strike price. It’s a bet that the share price will soon move strongly one way or the other.

That’s exactly what happened. As a result, that trade could have been closed out seven months later for a net gain of 26%. Over the same span, the S&P 500 Index lost 19%.

Six months ago, I suggested another long straddle on Carnival that paid off handsomely. That trade could have been closed out two months ago for a 49% net gain.

Combined, those two trades generated a cumulative profit of 75%. Over the combined holding periods of both trades, the S&P 500 Index lost 13%.

More impressively, we booked that gain while Carnival’s share price fell 42%. And we did not do it by gambling that it would fall. We were simply betting on it to move one way or the other.

In short, both of those trades were bets on the constant conflict between greed and fear on Wall Street. I believed that would make either the call or the put option pay off enough to more than cover the cost of buying both, and it did.

Sink or Swim

Once again, I think a long straddle is the way to go. Last week while CCL was trading at $9.62, the call option that expires on September 15 at the $10 strike price could be bought for $1.40. The put option that expires on the same day at the same strike price could be had for $1.60.

That makes the combined cost of this straddle $3. For this trade to be profitable, CCL must rise above $13 or fall below $7 within the next five months.

A lot of things can happen between now and then. Oil prices could surge, driving up Carnival’s single biggest variable operating cost. At the same time, a steep recession could lessen demand for cruises.

That’s the bear case for Carnival. The bull case is that oil prices will remain relatively low (compared to last summer) and a recession will not materialize.

If that happens, the company might be able to start paying down the massive amount of debt it has accumulated since the onset of the coronavirus pandemic three years ago. In that case, Wall Street might get back on board with the cruise ship operator.

Either way, I’m expecting choppy seas for Carnival over the next several months. I don’t know if it will sink or swim, but I doubt it will end up where it is now.

There is money to be made in the mayhem that creates stock market uncertainty. That is why I launched my Mayhem Trader investment service two years ago. We made a lot of money for our subscribers last year, and 2023 is shaping up to be another banner year.

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