If there is one aspect of the travel industry that may take a very long time to fully recover, it has to be the cruise lines. Cruises already were not universally adored as a travel venue before the novel coronavirus turned into the COVID-19 pandemic. Many people still want to go on cruises, but there are many travelers who will simply too scared to travel due to many realistic fears of catching a virus or fears of their boat being quarantined with no ports willing to accept them.

A research note from Morgan Stanley questions whether the cruise lines have raised enough capital in recent weeks and months now that their business models were gutted in the dual impact of the recession and the health concerns in a pandemic. While this is effectively nothing less than a “Sell” rating, the shares of main cruise line operators were surging on Wednesday.

While most analyst calls are easy to pick out at least some parts of the report, one aspect that is very hard to argue against is what amount of recovery is enough. With these stocks having more than doubled from their mid-March closing lows, this seems like a fair enough opportunity to lock in at least part of the gains that have been made.

The major cruise lines have collectively raised billions of dollars since the coronavirus, but it is rather evident that the industry is being deemed the one niche within tourism that will take the longest to recover. After all, the Centers for Disease Control have a “No Sail Order” until July 24, 2020. Morgan Stanley’s report even showed how Canada has a ban on cruise ships with more than 100 people until November of this year.

Jamie Rollo, the analyst behind the call, sees operating losses for the foreseeable future. The companies are also expected to have a high level of capital spending that will make their leverage look unsustainably high. All in all, Morgan Stanley is telling its customers that they should sell into what has been a 100% rally from the bottom in the key cruise line stocks.

In this same call, Norwegian Cruise Line Holdings Ltd. (NASDAQ: NCLH) was downgraded to Underweight from Equal Weight. That is their equivalent of a “Sell” rating at other brokerage firms.

Carnival Corp. (NYSE: CCL) and Royal Caribbean Cruises Ltd. (NYSE: RCL) were both reiterated as Underweight in the Morgan Stanley report.

While the report may fly in the face of the recent capital raises, this was also the same time that Carnival announced that its P&O Cruises line would be extending the opening of operations out to October 15 due to weakness and issues around the COVID-19 pandemic. A message from the company noted that there are health and sanitation protocols to consider, as well as proper screening plans prior to boarding and how best to serve meals and drinks. The namesake Carnival line is opening back up just eight of its own ships, with sailings starting on August 1.

International travel effectively is still shut down. The health screening and health issues on a cruise ship are also ongoing risks. Hence, the quarantine risks. One outbreak on even a single ship could create another systemwide shutdown. Cruise lines are expected to post wide losses in 2020 and to see more or less break-even results in 2021 in a transition period. Morgan Stanley even noted that earnings before interest, taxes, depreciation and amortization (EBITDA) in the industry may only reach 80% to 90% of levels seen in 2019.

Many investors may wonder why these stocks are all trading higher despite a prominent analyst report suggesting that the main companies all need to be sold. The reality is that the stock market tries to discount the news of today with an outlook that is perhaps six months out, or even longer in many cases. Right now is a time when “the reopening of the economy” stocks are being given more upside ahead than the “safety stocks.” We have identified the 40 COVID-19 safety stocks as a barometer for when things change.

Carnival shares have risen more than 110% and Royal Caribbean’s shares have risen more than 150% from their lowest closing prices in mid-March.

Shares of Norwegian Cruise Line had the lowest close of $7.77 on March 18, and there were only four days in mid-March (and three days at the start of April) that the shares traded under $10 at the close. Now the shares have challenged $18, and the strength in the market has even allowed the stock to rise despite the equivalent of a “Sell” rating. Norwegian’s 52-week trading range is $7.03 to $59.78.

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