These 2 stocks could become too expensive.

Cruise travel can be a lot of fun, and consumers are increasingly choosing the vacation option. This trend is unlikely to change in the long term. But there’s an important wrinkle here that investors shouldn’t ignore when looking at industry leaders. Carnival Co., Ltd. (CCL 0.17%) and royal caribbean cruise (RCL -0.44%). Read this before buying one of these stocks.

Up, up and away

Carnival’s stock price has experienced a dramatic rise of approximately 85% over the past year. Royal Caribbean stock performed even better, up more than 120%. for comparison, S&P 500 The index is up about 20% over the same period, which most investors would consider a very attractive performance. Both cruise lines have embarrassed the market’s gains.

CCL data from YCharts.

There’s no doubt that investors have very good reasons to be positive about Carnival and Royal Caribbean. For example, after their stock prices plummeted in 2020, both companies saw significant recovery in sales and profits. And reservations remain solid for both cruise lines. For example, in its fiscal 2023 fourth quarter earnings call, Carnival stated record 2023 sales, record bookings during Black Friday/Cyber ​​Monday sales, and customer deposits in the fourth quarter were up 25% from previous record levels. In Royal Caribbean’s third quarter 2023 earnings call, CEO Jason Liberty noted, “Our boardings are higher and our percentages higher than in previous years.” At this point, it looks like both companies will have a pretty good year in 2024.

Wall Street is forward-looking

But given the massive gains in both cruise stocks, it seems investors are already pricing in a lot of good news. In fact, even if the positive outlook among investors is justified, a share price increase of more than 80% in one year is enough to make you take a step back and carefully consider your investment decisions. As the old saying goes about being too positive about a good trend, trees don’t grow all the way to the sky.

The biggest problem here is that cruise travel is, at best, a luxury service. Therefore, demand will increase and decrease along with economic activity. If a recession occurs, investors will likely abandon Carnival and Royal Caribbean. It’s unfair to look at the pandemic as a reference point here (when governments order lockdowns), so it’s best to go back to the Great Recession. As the chart below shows, these two stocks could take a big hit in a weak macroeconomic environment because the market assumes customers will spend less.

CCL data from YCharts.

The problem today is that it is difficult to get a true sense of what these two companies are worth due to the massive impact of the pandemic period on a valuation front. Notably, Carnival’s inventory is still well below pre-Covid levels, while Royal Caribbean’s is back to where it was before the illness halted business. So it’s not that hard to think there’s more upside potential here.

CCL data from YCharts.

However, credit card debt reached an all-time high in 2023 and delinquency rates are rising. Meanwhile, large banks, etc. bank of america We have been adding to our loan loss reserves as we anticipate an increase in the number of customers who will be unable to repay their loans. There are clear signs that the U.S. economy is not currently hitting on all cylinders. All it takes is some negative economic news and Wall Street could start looking for cover, which would likely hit Carnival and Royal Caribbean stocks particularly hard given their impressive developments.

At this point, there are more downsides than uptrends.

There’s nothing wrong with Carnival or Royal Caribbean, and at this point, 2024 looks like it’s going to be a good year for both companies business-wise. But considering the massive price rises over the past year, it’s also pretty clear that Wall Street already recognizes this fact. And with so much good news already priced into stocks, investors should consider how much further they can go versus what might happen if the story takes a negative turn. More conservative investors and those with a value bias would do well to exercise caution here.