Will Cruise Stocks Sink Your Portfolio in 2018?

The cruise industry is enjoying a period of undeniable growth. Cruise Lines International Association (CLIA) projected that nearly 26 million passengers boarded cruise lines in 2017, a 45% increase from 2009 and the eighth-straight year of passenger growth for the industry. That number is expected to rise by another 2 million passengers in 2018.

A large percentage of those passengers, 11.5 million in 2016, come from the United States, while Germany, the United Kingdom, and Australia provided between 1.29 million and 2.02 million passengers each during that same year. More importantly, China sat second in cruise passengers in 2016 at 2.10 million and offers one of the most tantalizing growth opportunities in the industry.

That industry, which is dominated by just three main players, Royal Caribbean Cruises Ltd (NYSE:RCL), Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), and Carnival Corp. (NYSE:CCL), which control a combined 80% of the market, appears to have a lot of positive tailwinds behind it, not least of which is the fact that Millenials appear to be embracing (or plan to embrace, when they’re not so mired in debt) cruise travel like previous generations of young people haven’t.

Most Expensive Cruises in the World

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However, there’s a growing fear among some analysts and investors that the industry isn’t growing fast enough to justify the mad dash to build more (and costlier than ever) ships that is taking place, not just among the big three players, but from eager upstarts looking to ply their own sea routes as well, including Richard Branson’s Virgin Voyages and hotel chain Ritz-Carlton, owned by Marriott International Inc (NASDAQ:MAR).

A record 91 cruise ships were on order at the end of 2017 valued at $58 billion and encompassing over 239,000 berths. 20 of those are expedition ships, while a dozen “mega-yachts” are scheduled to be completed by next year, putting pressure on the limited top-end of the market. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) recently unveiled its $1 billion Norwegian Bliss, a luxury liner that is decked out with everything from a race track to laser tag and an aqua park.

After a big 2017 for cruise stocks, in which Royal Caribbean Cruises Ltd (NYSE:RCL) gained 49%, Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) 25%, and Carnival Corp. (NYSE:CCL) 31%, all three stocks have suffered declines in 2018, with Royal Caribbean shares being hit the hardest, shedding 13%.

It should be noted that the broader stock market is also down this year, though cruise stocks have nonetheless underperformed the market. In contrast, our flagship “Best Performing Hedge Funds Strategy” gained 4% in the first-quarter vs. a loss of 1% for the S&P 500 ETF (SPY). Since its inception in May 2014, this strategy’s picks have returned 74.4% vs. 49.7% for the SPY. You can see our latest picks by trying our newsletters free of charge for 14 days.

On the next page we’ll look at the outlook for each of the three companies in 2018 and beyond.