This share price has fallen 70% in the stock market crash, should you buy?

Matthew Dumigan
Financial technology concept. Stock market crash.

The stock market crash means there’s an abundance of bargains out there at the moment. Right now, it’s a value investors dream. These are the market conditions in which investing powerhouses like Warren Buffet truly thrive and make their money.

You can build immense wealth over the long-term by taking advantage of the buying opportunities the stock market crash offers. That said, it’s important not to buy stocks just because they look cheap.

Cheap, but volatile

Speaking of stocks that look cheap, cruise ship operator Carnival (LSE: CCL) has seen its share price plummet just over 80% in the depths of the market crash.

To illustrate the volatility of the Carnival share price, from March 18-26, it rocketed 91%. But just a week later, the price plummeted 55%.

Thanks to a brief rally earlier this week, the share price saw a 40% hike, but still comes in just over 70% down overall since mid-February.

It’s been a stomach-churning ride for investors.

Future uncertainty

The international cruise line operator has been particularly hard hit due to the nature of its business. With lockdowns and travel restrictions in place around the world, nobody is embarking on a cruise ship holiday.

Ultimately, the longer the travel restrictions remain in place, the more unlikely it is that the company will stay afloat.

Carnival itself acknowledges this and is looking to raise $6bn in new funding to aid its survival efforts.

A big risk

I think buying shares in Carnival would be a huge risk for any investor. But the prospective rewards might more than compensate for this for the risk-tolerant investor.

The company reported decent results last year with cruise revenues up on the previous four years. That said, losses for this calendar year are expected to be huge, placing the company under significant financial strain.

To invest, or not to invest

When making the decision whether or not to invest, it’s helpful to weigh up both sides of the argument. On the one hand, the company went into this crisis with a relatively stable balance sheet and has now began to raise funds in order to strengthen its cash position.

On top of cutting its dividend, such cash-preserving developments might suffice when it comes to Carnival’s ability to weather the storm.

In taking this view, now could be a good time to buy dirt-cheap shares in the company.

On the other hand, nobody knows for how long the current economic conditions will prevail. Even if they’re short-lived, the costs incurred by Carnival will be immense.

Repatriating passengers, assisting stranded crew and disinfecting ships all comes at a cost. What’s more, the challenge facing the company is unpreceded. Never before has the cruise operator experienced a complete dry-up in its operations.

So where do I think that leaves the investment case? Well, with all that in mind, it may be best to avoid shares in Carnival.

Ultimately, I think the decision depends on whether or not you’re bullish about its recovery prospects. I’m sceptical, so I’ll be sitting this one out, for now.

The post This share price has fallen 70% in the stock market crash, should you buy? appeared first on The Motley Fool UK.

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Matthew Dumigan has no position in any of the shares mentioned  The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020

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