In a rough market, even great companies will miss on earnings. But how they miss can be illustrative of their potential future returns. For instance, with inflation data coming down, companies dealing with high costs could see that factor fade away.
With Wall Street looking at each quarter’s numbers compared to the year before, declining costs could lead to a big move higher for any company with something positive to report.
For instance, Carnival Cruise Lines (CCL) reported a narrower loss in its most recent quarter. The biggest issue was rising food and fuel costs, which weighed on the bottom line. However, those costs have started to decline on a year-over-year basis.
Shares of the cruise line are still down 62 percent over the past year. However, the stock now trades at 1 times its price to sales, and shares recently had a price-to-earnings ratio of just 6.
Action to take: Investors may like Carnival here. The cruise industry has a high cost of capital to get started, and there are few players. Plus, high costs in fuel and food tend to get passed on to passengers, and prices tend to remain higher after inflation. That could result in a solid long-term returning play from here.
For traders, a long-dated call like the September $12 call, last going for about $0.95, could return high-double-digit returns if operations continue to improve and shares rally from here.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.