Motley Fool: Cruising for profits
If you’re hesitant to board shares of Carnival Corp. (NYSE: CCL) these days, you’re not alone. But this is a great time to consider an investment in the industry giant that operates 87 cruise ships across nine different brands worldwide (including Carnival Cruise Line, Holland America Line and Princess Cruises).
Total customer deposits at Carnival for future sailings are at an all-time high of $8.3 billion. In the company’s second quarter, revenue rose 18% year over year to $5.78 billion, exceeding Wall Street expectations. Where analysts were expecting a loss, Carnival posted a net gain. Carnival has been exceeding Wall Street profit targets since resuming normal operations almost two years ago.
The same Carnival that, during the darkest stretches of the COVID-19 crisis, some figured would never turn a profit is trading at a recent price-to-sales ratio of 0.8, well below its five-year average of 1.3 (which includes some years heavily pressured by the pandemic).
Carnival’s doing a good job of cleaning up its balance sheet now that it’s making money again. It has bought back $6.6 billion of its debt in the last five quarters. Carnival bulls expect debt repayments, more efficiency from a newer fleet and, eventually, a return to paying out quarterly dividends. Bears worry that there’s still a lot of debt to pay off. Do a little digging and see what you think. (The Motley Fool recommends Carnival.)
My dumbest investment
My most regrettable financial move? Changing cars every three years when I was in my 30s. – M.M., online
The Fool responds: Many people change cars frequently, and it’s generally not a great move financially. It’s especially harmful if you’re buying a new car every few years, because cars typically lose about 20% of their value in their first year and then around 15% of the lowered value each year after that.
Let’s say you bought a new car for $25,000. It might be worth only $20,000 after one year, and $14,450 after three years – that’s just 58% of its original value. If you sold it then to buy another $25,000 car, you’d be shelling out over $10,500. Do that three times in a single decade and you’d lose more than $30,000 – which could have been used for other goals, like boosting your retirement account considerably.
Repeatedly leasing new cars instead of buying them and driving them for a decade or more is also usually not a great move. Yes, you’ll have lower monthly payments, but you won’t build equity in the car, and you may have restrictions such as mileage. You’ll also keep making monthly payments – whereas a car buyer will generally pay for only a few years, after which they’ll own their car outright.
Ask the Fool
Q: What’s “vulture capitalism”? – S.H., Centerville, Utah
A: In the more familiar venture capitalism, wealthy people pool their money to invest in companies privately. Typically, these are small, relatively young companies before they debut on the open market, usually via initial public offerings (IPOs). Many well-known companies – such as Apple, Airbnb, Pinterest and Spotify – received early funding from venture capitalists.
“Vulture” capitalists are a type of venture capitalist, but they provide financing to companies (and sometimes even governments) in crisis – often buying distressed companies at low prices. They may require extreme cost-cutting and typically sell off assets – and the companies may still end up bankrupt.
Q: I read somewhere that it’s easier for a 50-cent stock to go to $1 than for a $50 stock to go to $100. Is that true? – G.L., Decatur, Illinois
A: Nope. First, understand that a stock priced at 50 cents per share is a penny stock, and penny stocks, in general, are notoriously volatile and risky. (Penny stocks are often defined as those trading for less than around $5 per share.) That 50 cents-per-share price may seem low, but it’s low for a reason: Penny stocks are often tied to shaky and unproven companies. The stock may very well fall to 10 cents or 1 cent per share instead of doubling to $1.
Meanwhile, that $50 stock may well belong to a profitable company with a track record of growing its revenue and earnings. The stock may be on its way to $100, $200 or higher. With any stock you’re considering buying, be sure to read and learn a lot about it. Ideally, you want to invest only in great companies and only when they’re trading at good or great prices.