When retrospectives are written about the stock market in 2020, much of the coverage will inevitably be framed in relation to the coronavirus pandemic. Despite the year being characterized by incredible volatility and record uncertainty, the S&P 500 the index had risen about 15.5% as of December 31.
^ SPX data by YCharts
The technology sector played a major role in driving the index’s gains, with conditions related to viruses accelerating transitions to digital commerce and encouraging investors to embrace growth-dependent valuations for companies that could thrive in a rapidly changing economy. Of course, the coronavirus pandemic has also shaped the performance of the biggest losers in the S&P 500: Carnival Cruise Lines (NYSE: CCL), Western Oil (NYSE: OXY)and Norwegian Cruise Lines (NYSE: NCLH).
Is it time to buy these defeated stocks? Let’s take a look.
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Carnival and Norwegian faced turbulent waters
The cruise industry was hit hard in the midst of the pandemic, and companies that had no other business units to mitigate the blow suffered sharp drops in valuation. Carnival and Norwegian were crushed this year, with stocks coming in as the worst and third worst performing S&P 500 stocks in 2020, respectively. The chart below tracks the performance of each company in the year.
CCL data by YCharts
Putting these dizzying falls into context is quite simple: Coronavirus concerns have prompted both companies to temporarily suspend operations, and continued delays to resume operations have resulted in Carnival and Norwegian losing much of the market recovery that occurred after the record break in March.
Carnival and Norwegian are scheduled to start sailing again in early March 2021. However, the recent discovery of mutant strains of coronavirus and new travel restrictions in the UK and other territories suggest that additional delays may be at stake.
At some point, the world in general will approach a state of normalcy, which, in turn, should lead to better operating conditions for the cruise industry. This could pave the way for a major recovery for Carnival, Norwegian and other companies operating in space. Investors simply cannot count on the timing and extent of a potential recovery as certain things.
Both cruise actions offer potential for appreciation, but betting on either means embracing the risk that further twists and turns in the coronavirus pandemic and a change in consumer behavior could easily make the thesis unviable. It is quite possible that one or both companies will choose to delay their restart beyond the current March target, and it is possible that each company will see a reduction in consumer interest long after the worst of the virus-related threat has dissipated.
Occidental Petroleum felt the crisis in the energy sector
Like the travel industry, the energy sector has been hit hard by the coronavirus pandemic. Reduced travel, factory shutdowns and a pivot for domestic jobs have meant a significant drop in energy demand. Occidental Petroleum saw its share price drop about 56.5% in the 2020 trades and entered as the second worst performing stock on the S&P 500 index.
OXY data by YCharts
Weak demand and a bad balance sheet forced the company to cut its dividends earlier this year. Some investors have also expressed concerns that the company may be on the verge of bankruptcy. However, there are ways for Occidental Petroleum’s shares to recover substantially and it appears that the cash flow to the business is expected to improve significantly in the short term.
It is possible that the business will recover while the global economy recovers from the pandemic. It is also possible that another major energy company may decide to acquire Occidental and its assets at a premium compared to the company’s current valuation. On the other hand, business performance has been problematic and recent moves to refinance debt highlight the fact that the company is working with a problematic balance sheet.
If you think oil prices are likely to recover as the global economy recovers, Occidental is a stock that could see a big rise. This thesis has a fair chance of being worthwhile, but it would be wise not to consider it safe. The energy sector has become extremely complex this year and is likely to remain complicated and difficult to predict in the near future.
There is great potential for growth, but know what you are buying
There are clear reasons why Carnival, Norwegian and Occidental had such a hard time in 2020, and high levels of uncertainty about the performance of each business in the coming year and beyond explain why their actions were left out of the broader market recovery. They are not stocks of value in the traditional sense, but that does not mean that they cannot offer solid returns to investors.
Defeated stocks sometimes present attractive investment opportunities for those willing to embrace risk and face hardship, and the S&P 500’s three biggest losers in 2020 could make big recoveries if virus-related pressures eased in 2021. Those with high risk tolerance might find a lot of taste in Carnival, Norwegian and Occidental as recovery-oriented bets, but the individual risk factors for each company and the level of speculation involved in mapping the future effects of the pandemic mean that these actions will not be a good fit for many investors.