Let Your Portfolio Start Cruising With This Stock

Rather than chasing stocks that have already moved way up, I prefer to play with good companies still selling at undervalued levels. Carnival Corp. appears to meet that criteria. Higher fuel costs and President Donald Trump's abrupt termination of the right to dock in Cuba forced CCL to trim this year's estimate to slightly below the one achieved in 2018. Market reaction was brutal, knocking the shares down from a 52-week high north of $62 to a brief moment south of $40. On Oct. 17, CCL closed at $42.44. Despite this year's performance hiccup, Carnival's long-term record has been good. The past eight years saw profits grow more than 76%. Over that same period the dividend rate doubled. The recent pullback left CCL only 27.6% above where it sat exactly eight years earlier. That figure rises to 49.6% when cumulative income distributions are included. Clearly there's room for a catch-up move, bringing the stock price up toward the true value created. How much is CCL really worth? Carnival's typical multiple has run about 16.6-times, accompanied by around 2.72% in current yield. As of Oct. 17, its price-to-earnings, or P/E, was just 9.9-times the already trimmed estimate for 2019. Its yield was 4.71%, the highest available since the darkest days of 2008. Discount the multiple to 15-times due to near-term negatives, and you can still justify an end-of-December 2020 target price of $64.80 based on expected 2020 earnings per share, or EPS, of $4.32. That suggests 15-month total return prospects of 57%, greater than 52% in upside plus about 5% in yield. It's not crazy to think that will occur. CCL's worst annual peak over the last five years was $54.90, in 2016, on EPS of $3.45. Each of the other four years saw tops from $55.80 to $72.70. Yahoo Finance takes a positive view on CCL. Its ultra-conservative 12-month goal price is $48.47. That only assumes a bounce back to 11.2-times next year's projected EPS. Achieving even that very modest number would deliver almost 19% in total return. Independent research from Morningstar is more in line with my own projection. It assigns CCL a 4-star, out of 5, buy rating. Morningstar deigns to provide year-ahead target prices. It does, however, list its views for present-day fair value on each stock covered. For Carnival, that number is $58 per share. That implies total return north of 41% if it takes a full 12-months to get back to that level. CCL actually changed hands at $62.52 less than a year ago. Option writers can collect generous premiums for standing ready to own CCL at even cheaper than today's price. Selling in-the-money Jan. 21, 2022, expiration date puts at $45, $50 or $55 were bringing in $9.75, $13.10 or $16.85 per share respectively with CCL hovering at $42.44. Worst-case, forced-purchase prices dropped to from $35.25 to $38.15, levels from 10.1% to 16.9% below the trade inception quote. Future stock market action can never be guaranteed. That said, it's comforting to note that owning CCL below $39, as all the worst-case, net purchase prices illustrated would be, would have been a winning position 100% of the time dating back to before the start of 2015. Carnival has been unjustifiably knocked down to a truly undervalued price point. Buy some shares, sell some LEAP puts or consider doing both.

Let Your Portfolio Start Cruising With This Stock

Despite this year's performance hiccup, Carnival has enjoyed a strong long-term record, and clearly there's room for a 'catch-up' move.

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