Is Now the Time to Buy the S&P 500’s 3 Worst-Performing Stocks of 2020?

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 index had climbed roughly 15.5% as of Dec. 31.

^SPX data by YCharts

The tech sector played the biggest role in driving the index’s gains, with virus-related conditions accelerating transitions to digital commerce and encouraging investors to embrace growth-dependent valuations for companies that could thrive in the fast-changing economy. Of course, the coronavirus pandemic also shaped the performance of the S&P 500’s biggest losers: Carnival Cruise Lines (NYSE: CCL), Occidental Petroleum (NYSE: OXY), and Norwegian Cruise Lines (NYSE: NCLH).

Is it time to buy these beaten-down stocks? Let’s take a look.

Image source: Getty Images.

Carnival and Norwegian faced troubled waters

The cruise line industry got hit hard amid the pandemic, and companies that didn’t have other business units to lessen the blow suffered steep valuation declines. Carnival and Norwegian got crushed this year, with the stocks coming in as the worst-performing and third-worst-performing S&P 500 stocks of 2020, respectively. The chart below tracks each company’s performance in the year. 

CCL data by YCharts

Putting these precipitous declines in context is simple enough: Coronavirus-related concerns prompted both companies to temporarily suspend operations, and continued delays for resuming operations have resulted in Carnival and Norwegian sitting out much of the market’s recovery that took place following the record-setting crash in March. 

Carnival and Norwegian are now scheduled to start sailing again in early March of 2021. However, the recent discovery of mutated strains of the coronavirus and new travel restrictions in the U.K. and other territories suggest additional delays could be on the table.

At some point, the world at large will move closer to a state of normalcy, which should in turn lead to better operating conditions for the cruise line industry. That could pave the way for a big rebound for Carnival, Norwegian, and other companies operating in the space. Investors simply can’t count on the timeline and extent of a potential recovery as sure things.

Both cruise stocks offer potential upside, but staking a position in either means embracing the risk that new twists and turns in the coronavirus pandemic and a shift in consumer behavior could easily derail the bull thesis. It’s well within the realm of possibility that either or both companies will opt to delay their restarts past the current March target, and it’s possible that each business could see reduced consumer interest long after the worst of the virus-related threat has dissipated. 

Occidental Petroleum felt the energy industry crunch

Like the travel industry, the energy sector was hit hard by the coronavirus pandemic. Reduced travel, manufacturing shutdowns, and a pivot to at-home employment meant a significant drawdown in energy demand. Occidental Petroleum saw its share price fall roughly 56.5% across 2020’s trading and came in as the S&P 500 index’s second-worst-performing stock.

OXY data by YCharts

Weak demand and a poor balance sheet forced the company to slash its dividend earlier this year. Some investors have also raised concerns that the business could be facing bankruptcy. However, there are avenues for Occidental Petroleum stock to make a substantial recovery, and it looks like cash flow for the business should improve significantly in the near term.

It’s possible that the business will rebound as the global economy recovers from the pandemic. It’s also possible that another large energy company could decide to acquire Occidental and its assets at a premium to the company’s current valuation. On the other hand, performance for the business has been troubled and recent moves to refinance debt highlight the fact that the company is working with a troubled balance sheet. 

If you think that oil prices are due for a rebound as the global economy recovers, Occidental is a stock that could have big upside. This thesis has a fair shot at paying off, but it would be wise not to treat it as a sure thing. The energy industry has become enormously complex this year, and it will likely remain complicated and difficult to predict in the near future. 

There’s big upside potential, but know what you’re buying

There are clear-cut reasons why Carnival, Norwegian, and Occidental have struggled so much in 2020, and high levels of uncertainty as to how each business will perform next year and beyond explains why their shares have sat out much of the broader market’s recovery. These aren’t value stocks in the traditional sense, but that doesn’t mean they can’t deliver solid returns for investors. 

Beaten-down stocks sometimes present attractive investment opportunities for those willing to embrace risk and ride out rough patches, and the S&P 500’s three biggest 2020 losers could each see big rebounds if virus-related pressures ease in 2021. Those with high risk tolerance could find a lot to like about Carnival, Norwegian, and Occidental as recovery-driven bets, but the individual risk factors for each company and the level of speculation involved in charting the future effects of the pandemic mean that these stocks won’t be a good fit for many investors.  

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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