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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 headwinds 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.

Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) CEO Frank Del Rio believes Wall Street is acting irrationally in the case of his company’s shares, which have lost 6% this year. Speaking to TheStreet this week, Del Rio noted the concerns about supply growth but said that what’s more important than that growth is how companies similarly grow demand to meet it.

In the case of Norwegian, Del Rio said that bookings for 2019 are even stronger at this point than the bookings for 2018 were at the same point last year, and at a higher price to boot. Del Rio added that during an investor event that day, he challenged those assembled to provide one data point that would combat all of the positive data points he had shared, which was met with silence.

Last month, Wedbush analyst James Hardiman stated that while there is legitimate cause for concern about the industry’s capacity growth, that concern is overblown and shouldn’t affect cruise companies’ guidance in the near-term. He rates Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) very highly in particular, given the lower exposure that it has to the Caribbean market, where pricing has been soft.

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Carnival Corp. (NYSE:CCL), the largest of the three cruise giants with a fleet of over 100 ships, which accounts for more than 22% of the cruise ships in operation, also noted strengthening bookings at higher price points heading into 2018 and enjoyed accelerated revenue growth in 2017. Also of note was the company’s strong revenue yield growth of 9.2% in the first-quarter of this year. Investment bank Stifel Nicolaus encouraged investors to buy Carnival on its April weakness, noting that the market was making too much of Caribbean pricing in how they were viewing the broader cruise market as a whole.

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Royal Caribbean Cruises Ltd (NYSE:RCL) enjoyed the biggest gains in 2017 among cruise operators and has suffered the hardest fall in 2018. Nonetheless, its bookings are at record levels, and at higher rates than last year, and the company raised its fiscal 2018 earnings guidance alongside its solid first-quarter results.

While capacity is growing, there are few signs that the industry won’t be able to bear it in the near-term, with those fears appearing to be more smoke than fire. On the other hand, rising fuel costs will have an impact on the profitability of Royal Caribbean Cruises Ltd (NYSE:RCL) and other cruise operators, despite the hedges they have in place, though further pullbacks in May have already priced the impact of rising fuel into the stocks.

Given their recent weakness, cruise stocks offer some decent upside potential, while packed bookings for months in advance will limit the threat of any nasty surprises. While these investment waters do have a few sharks hidden beneath the surface, they’re unlikely to sink any portfolios in 2018.

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Disclosure: None