Carnival Corporation (CCL) is the most popular cruise brand in North America, operating between 80 and 90 ships. The company fosters an enjoyable experience at affordable prices. I am neutral on the stock.
Hedge Fund Sentiment
Although there has been some hedge fund activity during the past quarter, the general narrative remains tentative, with TipRanks’ 13-F tracker recording only 19.9 thousand share purchases for Carnival Corporation. Fund managers, including Lee Ainslie and Andrew Law, have bought Carnival stock; however other notable managers, namely Charles Clough and Ray Dalio, have sold shares in the cruiseliner.
Recent activity seems odd considering the loosening in travel restrictions and the conviction-seeking nature of the hedge fund managers. However, I believe that we’re looking at a statistical issue here with many quantitative hedge funds probably backing out due to Carnival’s poor shape ratio of -0.076, indicating that the stock has a poor risk-return tradeoff.
What Could Change This?
Investors will likely be looking out for travel policies. According to recent reports, the CDC has dropped mandatory COVID-19 rules on cruise liners and implemented a “voluntary COVID-19 risk mitigation program” for foreign ships that operate in U.S. waters.
This ruling could be the start of liberating COVID-19 travel restrictions and mandates, subsequently providing more certainty to investors of what to expect from Carnival’s topline earnings.
Adding to this, the stock is trading at a beta of 2.18, approximately 2x higher than it did pre-pandemic. If travel restrictions ease, we could see Carnival trade at a lower risk beta, which would be more suitable to the current market environment.
The market’s in a tizzy at the moment, and it strongly dislikes stocks with poor risk-return characteristics; Carnival could pose better risk-return characteristics than it did the previous two years if the mentioned travel policies progressively ease.
Valuation
Another reason hedge funds could be tentative on Carnival stock is due to its unclear valuation. The stock is undervalued by over 15% when you compare its price-to-sales ratio to its five-year average but is overvalued by 21% on a price-to-book basis.
In addition, there’s no clear indication of whether the stock is forming a momentum pattern or not, with it trading above its 50-day moving average but below its 10-and 100-day moving averages.
In a nutshell, we’re looking at a stock that’s providing no value signal, no indication of its momentum trajectory, and no signs of earnings growth or stagnation; and this explains why funds haven’t launched into Carnival stock lately.
Wall Street’s Take
Turning to Wall Street, Carnival has a Hold consensus rating, based on one Buy and four Holds assigned in the past nine months.
The average Carnival Corporation price target of $26.40 implies 33.3% upside potential.
Concluding Thoughts
Hedge Fund managers remain tentative on Carnival stock for a good reason. It’s still unclear in which direction Carnival’s earnings, value, and momentum factors will move; additionally, Carnival has a poor Sharpe ratio, providing a valid reason for the perceived hedge fund skepticism.
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