Carnival Cruise Line - Great Example of Overdramatization in Stock Markets

In the past year, I have already made two investments based on what I perceived as potential over dramatization of stock market emotion.  The first was the BP oil disaster and the second was the purchase of Greek debt.  If you don’t know what either one of these incidences were, please close this page and never come back to it.

QUICK RECAP: BP had a monster tragedy occur in the Spring of 2010 and I decided to pick up some shares after they were beaten down.  The shares, right before the disaster, were over $60 per share and I started to pick some up after they hit $34 per share and a few more on the way down to the $30 mark.  They ended up going as low as $26 or $27 per share before things got better.  The stock currently sits at $43 per share with a dividend yield of 3.8%.  At the time of my purchase, the dividend yield was over 10% BUT due to the $20Billion that BP had to put aside for damage relief, they suspended the dividend for some time to store up the money.

Now I bought BP because this disaster, while horrible, was hardly going to bury this company.  That, at least, was my assessment of the situation.  The company went from a market cap of $200Billion down to $80Billion or so at the bottom.  So, this estimated $20Billion disaster made the company lose $120Billion in market value. Does that sound like overly dramatic responses by investors? I would think so as well. In addition, it wasn’t like BP was poverty stricken. At the end of 2009, or just a few months before the disaster, BP had over $8.3Billion in cash and another $59Billion in receivables and inventory and other cash equivalents. That’s $67Billion in cash that they either had on hand or expected to have on hand within the year.  In addition, they paid out $11Billion in dividends in 2009, so after suspending that, it would only take a year of dividend reduction plus the $8Billion in cash to make up the $20Billion liability they took on. Either way, I am sitting on a pretty decent profit but MORE IMPORTANTLY, an investment in a great cash flow business that is known worldwide as a good brand.

The Greek Investment…This was basically speculation and for only a month. To read my article on this investment, please click the link below….

http://thecapitalistmanifesto.com/blog/2011/6/21/my-big-fat-greek-debt-investment-or-is-it-speculation.html

Carnival Cruise Line:

Ok, what I am about to say is NOT meant to be insensitive.  If anyone wants to say that it’s sick that I am trying to profit from tragedy, then this is not the place for you. I am making my comments and decisions on the events that occur each day.  Most of these events are good for some people and bad for others.  

As we all know, Carnival had a subsidiary in Europe that ran a cruise line that crashed into a reef and tipped.  Over 4200 passengers and crew evacuated this ship but, as of today, 25 are either dead or missing.  This happened over the weekend and of course, it was expected that Carnival would take a hit.  How big?  Who knows.  Markets opened on Tuesday (because of the Monday holiday) and the stock was down almost immediately 14%.  So I kept eyeing it throughout the morning and it kept going between 12.5% down and 14% so it seemed pretty steady. This was expected and by 3:30, I decided to buy some.  

Here is why I did this on the first day after the market opened.  This tragedy has an already expected outcome.  We know how many people are missing and we know how much the boat is worth.  There is very little information that isn’t already known. We know the insurance deductibles on the boat ($30MM) and what we can expect from loss of revenue and such.  It wasn’t like the BP investment that I made during the oil spill. It wasn’t known when the spill would stop! As for Greece, there still isn’t a deal to get the country out of trouble! The end isn’t in sight yet even now!

But Carnival…it’s basically there.  This is a strong brand with a strong company behind it.  They are the biggest player in the field and their margins are stronger than most.  They have good cash flow and they have already taken a beating because travel and leisure is the first to take a hit during recessions.  I bought at $29.59 at a P/E of 12 and a dividend yield of 3.3%. I am pretty pleased.  Just like BP, I am not in this for the short run (as of today, Carnival is at $31.30), but I bought this because it is a great company that is well-known as the premier cruise line and the best part…only 20% of the U.S. population has even been on a cruise! There is great growth potential here and abroad as other economies become stronger.  And better yet, the barrier to entry is huge! Do you know how much those ships cost to build?!? It’s in the billions per ship, from the last I read, so no average Joe can just build one and enter the market.

I feel comfortable with this investment and I expect to hold onto this for quite some time.  Remember, I don’t like to trade based on speculation very often, so when I can buy a good company at a good price because of the emotions of traders, I think I would be dumb not to jump at it.