Op-ed: Cruise line stocks are a light on the horizon for investors seeking diversification

The NASDAQ may have hit a bit of a blip in late June when it absorbed losses over six consecutive trading sessions at one point. But it rallied during the final days of the month, finishing comfortably in the black and it’s up over 30% through the first half of the year.

Only a handful of companies are responsible for most of the index’s gains thus far, including the likes of Nvidia (NASDAQ: NVDA), Meta (NASDAQ: META) and Tesla (NASDAQ: TSLA). While concentrations within indexes like this are hardly unusual, they are often a bearish omen. The good news is market breadth improved beginning in late May and leadership has expanded to include cyclical sectors and industries.

Still, these firms have become so expensive relative to the broader market that some analysts have recently begun downgrading them. Naturally, that may prompt some investors to look elsewhere if some of those names lose momentum.

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One place to start could be cruise companies: Carnival Cruise Line (NYSE: CCL), Norwegian Cruise Line (NYSE: NCLH) and Royal Caribbean International (NYSE: RCL). Perhaps no other industry took it on the chin as hard during the pandemic, which halted sailings for months.

Even as these companies have bounced back from the lowest of the lows, they remain unprofitable. Still, the industry has several things going in its favor currently. Consider the following:

• Relative to services, consumers are still spending about 20% more on goods than they did pre-pandemic. That gap, however, is closing, and according to Delta Air Lines (NYSE: DAL), the trend could have legs for a couple more years. On a recent call with analysts, management said that the shift from goods to services was “only in the middle innings.”
• Before the pandemic, cruises were about 20% less expensive than land-based vacations (i.e., reserving a hotel near a beach somewhere). Now, they are about 40% cheaper, providing cost-conscious travelers an attractive alternative.
• All three companies have cited a pronounced uptick in “new-to-cruise” customers. Previously, most of the demand came from longtime cruisegoers.
• Fuel prices — one of the biggest expenses for any cruise line — have been trending down since last summer. Crude is off nearly 10% this year and has toppled by more than a third from its June 2022 peak. All this helps margins.
• Cruise companies were forced to set aside cash as a risk buffer for credit card operators during the pandemic. Carnival put away about $1.7 billion, while Norwegian reserved $577 million. Those restricted cash volumes could soon come free, allowing both companies (Caribbean’s restricted cash is negligible) to put it back on their balance sheets, which should translate into added equity values — if they use that money to pay down debts.