Palm Beach. FL 1/18/12 (StreetBeat) -- When is it too early for investors to take advantage of a tragedy and attempt to scoop up battered stocks on the cheap, or to pile on the distressed company and go short? It's a question on the minds of traders today as shares of Carnival Corp. (NYSE: CCL) slump to a 3-month low after its Costa Concordia hit rocks and capsized off the Tuscan coast of Italy Friday night with 4,200 passengers and crew on board.Based on the prior performance of previous disasters digested on Wall Street, the answer is not for a long time. A rising death toll and list of missing passengers are foremost on the list of reasons would-be investors should steer clear. Add to that, fallout from a chaotic evacuation lead by a cowardly captain who is now facing criminal charges for abandoning his ship before his passengers, and this saga is clearly in the early stages of a long and costly ordeal for the world's largest cruise operator.
No less than 6 of 26 analysts who cover Carnival downgraded the stock ahead of the start of U.S. trading Tuesday morning, and several more cut their outlooks on rival Royal Caribbean (NYSE: RCL) as well. Together, these two companies alone enjoyed nearly 75% market share, and prior to the Costa Concordia disaster, both stocks enjoyed ''buy" ratings' from roughly two-thirds of analysts who followed them (although their estimates and price-targets had been trending lower as both stocks declined over the past year).
In the attached clip, Macke draws parallels with the BP (NYSE: BP) disaster two years ago and points out that shares of the oil company, while certainly up from its lows, are still not back to pre-spill levels. Interestingly, environmental costs are already being tacked onto Carnival's enormous bill, as leaks and spills are coming from the stranded ship and fears mount that it could break free of the rocks and sink to the bottom of the sea.
Beyond litigation and liability, other risks will be harder to quantify and will have ramifications for the entire cruise industry during its peak season. While cancellations can be tracked, trip insurance claims will be slower to emerge. Likewise for any trends on pricing and discounts which Macke predicts will be mitigated as the companies move to repair their images.
In short, if Macke and I had been looking for a way to play the consumer and/or leisure spending theme, the addition of a 3- 10% decline in the cruise line stocks today would hardly be enough of a sweetener to get us off the bench and into a distressed situation. As they say, there will always be another opportunity, and it's best to let this one pass.
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