Patrick Scholes says expectations on travel stocks are priced in: here’s why he’s right

Travel stocks continued to extend gains this year after bouncing back from last year’s March plunge. Most of the stocks are yet to hit pre-covid levels. Some investors see it as an opportunity to buy after the re-opening of the cruise industry.

However, Truist Securities general manager Patrick Scholes thinks investors may be overstating their high expectations of cruise stocks. Scholes told CNBC’s Squawk on the Street the expected boost from post-covid recovery may already be priced in the stocks. 

He has a sell rating on Carnival Corp (NYSE:CCL) shares with a price target of $18.00 per share and a hold rating on Royal Caribbean Cruises Ltd (NYSE:RCL) with a target price of $72.00.

Is Scholes right on travel and cruise stocks?

Looking at Carnival and Royal Caribbean for reference, the two stocks are up more than 40% and nearly 24%, respectively, this year. Analysts expect both companies' earnings to fall by more than 400% this year before bouncing back by over 100% next year. 

Therefore, there is no explanation why shares of the two companies have gained so much this year. It suggests that investors are already looking at next year’s earnings growth. As such, Scholes could be right in saying that high expectations on cruise stocks are already priced in.

The stocks have recently pulled back after facing strong trendline resistance. The pullbacks look poised to continue in the short-term before a rebound.

Carnival stock technical overview

Technically, Carnival shares have pulled back after hitting the $31.50 resistance level. The stock is now pulling back towards $25.28 per share. It is an ideal target for bearish investors. Bullish investors can target rebounds at $31.49 and $35.77.

Royal Caribbean stock technical overview

RCL shares have also pulled back recently after finding resistance at $97.65. The stock price is closer to touching the 100-day moving average, which could trigger a rebound. Bullish investors can target rebound profits at about $92.27 and $97.65. On the other hand, investors looking to short the stock can target profits at approximately $82.26 and $76.19.

Bottom line: Travel and cruise stocks may be overvalued

In summary, travel and cruise stocks face a significant earnings squeeze in the short term. Therefore, current bull runs are justifiable only if investors consider next year’s expected earnings growth. 

As such, Patrick Scholes may be right on his assessment of travel stocks amid upbeat market sentiment. CCL and RCL shares look poised for short-term pullbacks.