Capital 19 Catch-Up

Is it time to buy the Cruise Lines?

It’s been a while since Wall Street has been this negative.

The Dow Jones Industrial Average and S&P 500 logged their first four-week decline since August 2019, falling 1.8% and 0.6%, last week. Those declines came amid concern over another potential wave of coronavirus cases and lingering uncertainty around a new U.S. fiscal stimulus bill.

U.K. Prime Minister Boris Johnson said Tuesday the country was at a “perilous turning point” and reinstated some lockdown measures. Cases also surged in France and Spain. In the U.S., the national seven-day average rose nearly 9% through Thursday from the prior week.

On the stimulus front, House Democrats are preparing a $2.4 trillion relief package that they could vote on as soon as next week, but don’t hold your breath for it. However, that price tag remains well above what Republicans have said they would support.

At one point, the Dow was down more than 3% for the week and the S&P 500 had lost more than 2% over that time period.  However, a late-week surge in tech stocks lifted both indexes from their lows of the week and helped the Nasdaq Composite snap a three-week slide.

The four-week slide took the S&P 500 down 10% at last week’s low, cost the Nasdaq Composite as much as 14%, relieved grossly overextended conditions in mega-cap tech shares, punctured investor overconfidence and showed newcomers to trading that stocks don’t always go up.

It was the pull-back everyone was waiting for and traders are breathing a sigh of relief that markets have performed somewhat “normally” over the past month.

By Friday, only a quarter of S&P 500 stocks were above their 50-day average, right at the border of a common “oversold” reading. More than a third of the stocks in the index are at least 20% off their high.

No magic buy triggers there, but moving in the direction of a better risk/reward setup. If the main complaint through the US summer was stocks had raced ahead too far too soon, this reset offers an answer to it.

In summary, whilst the week was negative for stocks, it was also constructive in that markets are giving a better entry point to the technology sector than we have seen in a few months and it has reduced concerns the market is ahead of itself.

From March onwards it has been the technology sector that has led the market. Industrials have lagged behind because they are more economically sensitive. But it is just this sector that we believe offers the best risk-reward at this point. Especially as it sounds like we might be getting closer to a vaccine.

Over the weekend, Johnson & Johnson (JNJ) reported results from their vaccine trial.

Early results from a Phase 1/2a clinical trial showed it was well tolerated and even one dose appears to produce a strong immune response in almost all of the 800 participants.

Researchers found that 99% of participants in the 18-55 age bracket had developed anti-bodies against the virus 29 days after getting vaccinated. The analysis found that most of the side effects like fever, headache, fatigue and body-aches were mild and resolved after a couple of days.

Dr Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases says Covid-19 vaccinations could very likely start in November or December.

Which could be a boon for the beleagured cruise line industry.

After months of uncertainty it could be time to hop back on board with cruise line stocks, according to Barclays analyst Felicia Hendrix.

She wrote of Carnival (CCL), Norwegian Cruise Line (NCLH) and Royal Caribbean (RCL) – “risk/reward is the most attractive in our coverage universe” and added “investors who have previously written off cruise stocks should begin to revisit their models” and that the industry is in an “inflection point” as the Centre for Disease Control and Prevention could life a no-sail order as early as next week.

The basic tenet of investing is to buy something you believe someone else will pay more for in the future. With the cruise line industry so beaten down, it isn’t hard to conceive a vaccine and a no-sail order lifting causes a re-rating of the sector and it will likely happen fast so don’t hang around if you want to capitalise on it.