Gregory Bergman
Editor-in-chief, CapitalWatch
First, if I was listing three of my favorite things, that list would not include financial fraud, the oil industry, or the idea of being stuck on a seagoing Petri dish with a mix of geriatrics and drunken, Gen-Z date rape enthusiasts (sex crime on cruise ships is shockingly high). So, too, is criminality, more generally. Cruises are often a source of murder, mayhem, and a host of maladies--from legionnaire's disease to Covid-19, cruise ships seem intentionally designed for a perfect storm of infection.
Admittedly, I did have fun on a four-day cruise from LA to Mexico. It was not the unlimited cheeseburgers or the seasickness that won me over, but rather an impromptu interlude which may or may not have taken place and which may or may not have included my ex-wife, myself, and a Russian divorcee. Fun times followed by choppy seas, I assure you.
But I have said all this before. I have also said that buying cruise stocks was about as inane as cruising itself. And I have said to avoid Luckin Coffee (OTC: LKNCY) as if it were a plague ripping through the cabin of a ship. But, despite all the reasons why Luckin Coffee shops and cruise ships should not exist, they are both here to stay. So, grab your diversified portfolio and climb aboard. Here's why:
Luckin Coffee: A Sweet Aftertaste?
Most of us know the story of Luckin Coffee. In a nutshell, the company was supposed to be the Starbucks of China, giving the American coffee giant a run for its money on the Mainland. The Beijing-based company launched in 2017 and quickly grew its stores and pick-up locations to rival Starbucks (Nasdaq: SBUX) in China. The stock exploded in popularity. And then, it just exploded.
First, reports emerged in January that Luckin had fabricated its financial data, an allegation which the company, of course, denied. Then regulators launched a probe into Luckin in April and found that the company violated Chinese competition laws by inflating its operational data with false statistics to "deceive and mislead the public."
Regulators also discovered that Luckin falsely increased its 2019 profit margin and revenue by booking more than 2 billion yuan of sales through fake coupons. From January 17 to May 21, Luckin's stock price plummeted more than 95%. Consequently, Luckin "chose' to delist and now it trades as a penny stock on the over-the-counter market.
The bitter taste of the Luckin scandal lingered in the mouths of American investors, leading to the series of China-focused legislation designed to protect investors from future accounting malefactions of such magnitude.
But that was then, and this is now.
On Tuesday, the stock rose 12% on news that Luckin, along with 43 fraud-friendly firms that abetted Luckin in the scandal, got hit with a 61 million yuan fine ($8.98 million). That's right, only a little under $9 million spread across all these companies for a fraud that, according to Luckin's own internal investigation, inflated reported revenue by 2.12 billion yuan, or around $309 million. A small price for an epic fraud.
Will Luckin ever become the Starbucks of China? Who knows? But will it trade more than a little over $3 per share like it does now? I think so. Allocate an exceedingly small slice of your portfolio and roll the dice. If you make a profit over 25%, I suggest you turn in your chips; I will.
Cruisin' for a Bruisin' Well Before Profits
I wrote to stay away from cruises on the eve of the Covid-19 outbreak in an article entitled "It's Official: There Is No Reason to Ever Go On--Or Invest In--A Cruise."
The date was February 21, and the stock in Carnival Corp. (NYSE: CCL) was trading at around $41 per share, having taken a recent hit on account of a coronavirus outbreak on the Carnival-owned Diamond Princess ship docked in Tokyo. Passengers were beginning to be able to leave the ship; 300 Americans were evacuated but forced to quarantine. One American, Kent Frasure, had been in quarantine for 14 days and tested negative twice.
"It's a big concern," Frasure said.
"Am I allowed to walk the streets of Tokyo? Can I walk into a Pizza Hut or something?"
Simpler times, indeed. Market experts shared cruisegoers' sentiment. Most were equally unconcerned with the virus, if not equally concerned with the number of Pizza Hut locations in their vicinity. (Looking back, Frasure should have stopped obsessing about Pizza Hut and bought shares of Domino's.)
Mark Tepper, president and CEO of Strategic Wealth Partners, said this at the time on CNBC's Trading Nation: "In my opinion, the coronavirus has really created a buyable pullback." Tepper added, "Of all these names, my favorite would be Norwegian."
We know what happened after that. Norwegian Cruise Line (NYSE: NCLH) and all the big public-traded cruise liners sunk to disastrous levels. Shut out of the stimulus, they capsized. Then, months later after the March selloff, cruise bulls came out again and said to buy. This time, they were right. Shares of Carnival and Norwegian have doubled while shares of Royal Caribbean have tripled. And yet, not surprisingly, these stocks are still way down from their highs as their ships sit at port, weighed down by a cargo of debt.
Today, Norwegian trades at around $17 per share, while Carnival trades at around $15. At around $65 per share, Royal Caribbean (NYSE: RCL) is still less than half of what it was pre-Covid-19.
Still, why would we look to cruises again when the Centers for Disease Control and Prevention (CDC) just extended its no-sail order through October? Why buy these stocks when the U.S. President is stricken with the coronavirus?
Well, as for Trump, the market doesn't care. Stimulus is what the economy and the equity markets crave. At this moment, a sudden death of any stimulus bill would cause more havoc than the sudden death of the president, his wife, his staff, and his opponent Joe Biden.
As for the no-sail order, the CDC was rumored to consider canceling sailings until the end of February 2021---so it could have been worse (of course, they still can). And even if they don't, the cruise industry is still cancelling sailings on its own; Carnival has cancelled most of its sails through the end of 2020.
So why buy?
Well, Carnival has $8.2 billion in liquidity as of the end of August. As for Royal Caribbean, it successfully renegotiated over $2.2 billion in existing debt, and secured a binding loan commitment from Morgan Stanley for a $700 million credit facility. As for Norwegian, it had $2.5 billion of total liquidity as of June 30. True, it has a cash burn rate of $160 million, but all we are talking about here is whether these companies survive long enough for their stock to move up.
In my view, all three of these bacterial breeding grounds will sail again. Over 70% of Americans plan to take summer vacations. This summer, RV sales exploded because road trips were the only game in town. But as Trump once said regarding a cut to Social Security: "Besides, how many times can you take the RV to see the Grand Canyon?"
While there is much debate as to which is the best cruise buy, I say buy them all. Carnival is the biggest but also the messiest; Royal Caribbean is the most well-run but it is also more expensive and shares have increased more from their lows than its peers; Norwegian boasts a newer, smaller, and more manageable fleet and no new ships scheduled to set sail for the next two years.
If I really had to choose which of these beleaguered stocks has the biggest upside for the lowest risk, I would choose Norwegian.
Real Returns Mean Real Risks
The fact if you missed the Zoom boat, you are not going to see huge returns in most tech. Zoom (Nasdaq: ZM) may not go down back to where it should trade based on a sensible valuation, but it is not going to double to $850 per share in the next 12 months. But Luckin Coffee, oil l (I like Exxon NYSE: XOM), and cruise ships just may.
The question is: Do you feel Luckin?
Gregory Bergman
Editor-in-chief, CapitalWatch
(The opinions expressed in this article do not reflect the position of CapitalWatch or its journalists. The analyst has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice)
