November Rallies with a Warning about Energy
5 Reasons to Buy Royal Caribbean (RCL), Carnival Cruise Lines (CCL), Norwegian Cruise Line (NCLH), and Disney (DIS)!
The November stock market was most unusual in that 14 of 19 days of trading (or 74%) resulted in gains. As positive U.S. economic data and pledges of continuing stimulus from Europe and China combined to push stock prices higher, oil continued to decline indicating both a slowing demand as well as an oversupply. Lower oil demand could be a warning, possibly signifying a global recession at hand. And that could portend negative reactions from global stock markets, especially the U.S. stock market, going forward.
Oil and energy demand and consumption data will require careful watching as we enter a fresh new year.
On the other hand, an oversupply of cheap oil or gasoline will help consumers worldwide. In particular, U.S. consumer spending will rise, especially the discretionary kind (e.g., flying and cruising), and companies in these industries will benefit greatly from lower fuel costs. In fact, when OPEC (the worldwide oil cartel) decided (on Friday, November 28th) not to lower oil production quotas, oil prices dropped 8% on that day, reaching the lowest prices in the last 5 years. Meanwhile, airline stocks (our favorites: Southwest/LUV, JetBlue/JBLU, and Delta/DAL) and cruise line stocks (RCL, CCL, NCLH) jumped 4-10% on the same day. We believe gains in these stocks should continue into 2015. Smart investors should take advantage of this developing trend and consider buying these stocks as long-term investments.
- A growing aging population with high discretionary income will drive increasing demand for cruising.
- New ships coming into service to meet these demands will result in higher revenues and profits. For example, Viking River Cruises (a private company – unfortunately, you cannot buy stock in it yet), projects adding 3 new ocean cruise ships and 10 new river cruise ships to meet the demands of its high-end customers, who are mostly Baby Boomers.
- Multi-generational family cruising will be a new twist that will add to cruising’s appeal and demand.
- The rising middle class in countries with growing economies (e.g., China) will require more cruising services to address their demands. Note: Recently, Royal Caribbean and CTrip (China’s prime travel agency) formed a partnership to specifically serve the Chinese cruise market.
- Low oil prices will greatly benefit the profit goals of all cruise companies.
Despite all the positives for cruise line investing, there are two dangers that could have devastating effects on the cruising industry: (1) the failure of cruise lines to enforce and manage health-related issues (disease, smoking, etc.) on board their ships and (2) the potential of cruise ships and their passengers as prime targets for global terrorist organizations. Let’s hope cruise line companies will take effective action to minimize the negative impacts of these two dangers. Investors should take some prudent but not major positions in these companies.
December and into 2015
For 2014 thus far, the U.S. stock market has performed quite well despite significant headwinds. Since we do not foresee any significant adverse impacts going forward, we will maintain our current allocation formulas for our TSOA retirement accounts model portfolios. Be sure to sign up for a free subscription to alert you of any changes.
Until 2015, Happy Investing!
Note: Jim owns shares of RCL, CCL, NCLH, and DIS in his personal, IRA, and Roth IRA accounts.