Easily one of the more surprising entities so far this year has been cruise ship operator Carnival (CCL). Amid a tough economic backdrop — marked by still-persistent inflation (relative to pre-pandemic norms) and the prospect of higher prices due to tariffs — CCL stock has been an unusually bright name. Since the start of the year, shares have gained almost 26%, significantly outpacing the benchmark S&P 500 (SPX).
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Still, it’s possible that the party could wind down. There is a case to be made that CCL stock is still attractively priced relative to sector peers, particularly Royal Caribbean (RCL). However, to assume that Carnival is somehow a good investment based on a relatively lower valuation presupposes that this relative discount stemmed from exogenous factors; that is, outside forces that arbitrarily discounted CCL, thus creating an artificial bargain.
On the contrary, when discussing valuation differences of publicly traded securities within peer groups, the delta is typically based on endogenous factors or elements that arise within the system itself. When it comes to CCL stock, the reason why it might appear like a relative discount is that the market is accounting for forward risks associated with internal headwinds, such as high debt loads or perceived execution challenges.
My primary concern with Carnival is that in the past few months, CCL stock has enjoyed a balance of market demand that has been overwhelmingly bullish. Ahead of the company’s fiscal third-quarter earnings report, it’s arguably better for options traders to consider the Bearish side of the sentiment spectrum.
CCL Stock Faces Potential Reversion to the Mean
Although CCL’s performance since early April has been nothing short of impressive, the concern moving forward is that long-side speculators could end up holding the bag. Looking at the historical chart of CCL, long stretches of acquisitive sessions tend to correct downward.
To be clear, this isn’t to say that the cruise ship operator is facing an extended implosion of its business. With the underlying industry offering significant bang for the buck, combined with lingering sentiments related to “revenge travel,” Carnival should be relevant for the long haul. However, over the next few weeks, my analysis detects considerable risks — particularly that CCL stock could revert to the mean after a lengthy rally.
In the past 10 weeks, the market effectively voted to buy Carnival stock seven times and sell only three times. During this period, the security enjoyed a robust move higher. For classification purposes, this demand sequence can be labeled 7-3-U.
Now, what’s really interesting is that in the prior 10-week period, CCL stock also printed a 7-3-U sequence. During this period, the security likewise posted robust growth in the charts. Looking back at the stock’s history, it’s rare for it to consistently post long stretches of bullish sessions without incurring a correction.
Add to that point the pressure of the upcoming fiscal Q3 earnings report. We’ve already witnessed well-performing enterprises delivering strong earnings beats, only to suffer market losses after delivering forward guidance that investors deemed conservative.
Obviously, I don’t know what’s going to happen during the quarterly disclosure. However, with so much enthusiasm baked into CCL stock, it seems to be a given that investors have elevated expectations. If those expectations aren’t met, Carnival could be due for a painful rethink.
Near-Term Upside May Give Way to Broader Weakness
It’s possible that, thanks to the incredible rally that CCL stock witnessed last Friday, investor sentiment could continue feeding the beast. To be sure, when the 7-3-U sequence flashes, there’s only a 41.2% chance that the following week’s price action will result in upside. That’s noticeably lower than the baseline probability of 51%.
Still, I’m not really interested in gambling on the near-term fluctuations of CCL stock. That’s a bit unpredictable right now, given the unique circumstances of the economy. However, the longer-term picture provides more clarity. Essentially, Carnival historically has difficulty maintaining momentum when investor sentiment is already red-hot. Notably, past analogs of the 7-3-U sequence suggest a gradual deceleration in sentiment.
Trading Strategy Takes Advantage of Wavering CCL Sentiment
With this forecast in mind, there are two multi-leg options strategies to consider, with both trades focused on the October 17th expiration date. First, more conservative traders may consider the 32/31 bear put spread. This transaction involves buying the $32 put and simultaneously selling the $31 put, for a net debit paid of $58 (the maximum possible loss).
Should CCL stock fall through the short strike price of $31 at expiration, the maximum profit is $42, a payout of over 72%. No, it’s not the most exciting prospect ever. However, this transaction only requires CCL to fall less than 1% from Friday’s close to the October 17th expiration date. All things considered, that’s a very realistic target if you believe in the bearish narrative.
The other trade to consider is the 31/30 bear put spread. This transaction requires a net debit of $46. If CCL stock falls through the short strike price at expiration, the maximum profit is $54, a payout of over 117%.
From a potential reward standpoint, the latter spread is much more appealing. However, the distance to the $30 target is 4.15% lower. That’s a magnitude 4x greater than the former spread, yet the payout isn’t even twice as much. Therefore, the decision separating the two spreads will come down to how much confidence you put into the bearish side of the argument.
Is CCL a Good Stock to Buy?
Turning to Wall Street, CCL stock carries a Strong Buy consensus rating based on 12 Buys, four Holds, and zero Sell ratings over the past three months. The average CCL stock price target is $32.36, implying ~3% upside potential over the coming 12 months.
Carnival’s Rally Faces Near-Term Test
Carnival’s strong performance this year deserves credit, but questions remain about its near-term trajectory. After a 20-week run in which 70% of sessions closed higher, the probability of CCL stock losing steam is increasing. If momentum slows, investors may want to consider two bearish options strategies, each offering different payout profiles depending on conviction.