New Trade for October 10th, 2023

The past few years have been quite the rollercoaster for companies and investors alike. After the pandemic-induced market crash in early 2020, the Federal Reserve responded by slashing interest rates to near zero. This move allowed many companies to borrow heavily at cheap rates, helping them weather the economic storm. However, a lot of this debt came with floating interest rates, leaving these firms vulnerable when the Fed began raising rates in 2022.

Now, as interest rates reach their peak, businesses dealing with floating-rate debt are feeling the pinch from rising interest payments. Their profits and stock values have taken a hit. But here’s the silver lining: this pain is likely temporary for companies with solid fundamentals. While the floating-rate debt initially felt like a boon during the pandemic, the high interest costs are currently impacting their cash flows. Nevertheless, as rates eventually stabilize and decrease, there reason to believe that today’s beaten-down name will swiftly regain its financial footing.

 Carnival Corporation (CCL)

As debt expenses reduce, their earnings growth is set to accelerate significantly, leading to higher stock prices. For savvy investors, this presents an opportunity to invest in high-quality companies with substantial floating-rate debt while their prices are still down. When their performance bounces back as rates decline, you can reap the rewards.

One such company worth considering is Carnival Corp. Carnival has experienced a tumultuous few years, with its stock plunging more than 80% from its 2018 peak due to the pandemic’s impact on the cruise industry. However, there are encouraging signs of improvement. In the latest quarter, Carnival beat Wall Street estimates with revenues of $6.85 billion and earnings per share of $0.86.

Occupancy levels have approached historical highs across Carnival’s fleet, while ticket prices surged 7% above 2019 levels, indicating a rebound in demand. Additionally, the company is making headway in paying down debt and reducing leverage, which should further enhance its financial stability.

Despite ongoing challenges like high fuel costs and inflation, Carnival’s stock, currently trading around $13, presents an enticing opportunity for long-term investors. This price level is reminiscent of where it traded in 1996, ignoring the pandemic-related anomaly. With its core cruising business on the upswing, Carnival appears significantly undervalued at present levels. Market sentiment may be underestimating its resilience and potential in the post-COVID era, with a consensus upside potential of 47% for the stock.

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