2 Stocks That Could Be Silent Wealth Killers

The S&P 500 is once again trading around all-time highs, despite the ongoing coronavirus pandemic and recession. But not every company will manage to ride the wave higher. Here are two stocks that could be silent wealth killers because of their inability to stay afloat in the tough economic environment.

The first bad stock is Carnival (NYSE: CCL), an embattled cruise ship operator that is sinking under an unsustainable load of debt. The second is GameStop (NYSE: GME), a brick-and-mortar video game retailer that is unlikely to survive consumers' growing appetite for digital downloads.  Money on fire.

Image Source: Getty Images.

1. Carnival

Carnival is a popular stock for investors hoping to bet on a recovery in the cruise industry. Unfortunately, that risky strategy will probably end badly. Carnival stock is down 71% year to date compared to a 5% gain in the S&P 500. And shares are likely to continue underperforming the market because of the company's massive cash burn and increasingly unsustainable debt load.

Carnival reported second-quarter earnings on June 18, and the results were a disaster. Total revenue fell 85% from $4.84 billion to $740 million due to a collapse in passenger ticket and onboard revenue. To make matters worse, the company's operational costs didn't drop enough to offset the lower sales, leading to significant cash burn.

Carnival is burning through an average of $650 million in cash per month, which is putting significant strain on its balance sheet. The company reported $6.88 billion in cash and equivalents and $14.87 in long-term debt as of May 31. While it has enough liquidity to stave off bankruptcy until cruising resumes, its massive debt load will squeeze cash flow and limit potential share price appreciation, even after the crisis is over.

Most recently, Carnival closed a $900 million bond note with an interest rate of 9.875%. The federal no-sail order is set to expire on Sept. 30, but it can be extended longer depending on the severity of the pandemic.

2. GameStop

GameStop stock is down by just 17% year to date -- which doesn't look too bad considering what a difficult year it's been for brick-and-mortar retailers. But when we zoom out to look at the company's longer-term performance, a grimmer picture emerges.

Over the last five years, GameStop stock has fallen by a staggering 88%. Shares are poised for continued declines because of the company's outdated business model and consumer shift toward buying games online.

Like Carnival, GameStop has been hit hard by the coronavirus pandemic. The company reported second-quarter earnings on June 9, and the results were a train wreck. Total revenue fell 34% to $1.02 billion, and net loss came out at $165.7 million, which is a very high number compared to its cash balance of just $570.3 million.

GameStop is struggling despite surging video game sales, which are up 32% in July, according to market research company NDP Group. GameStop isn't benefiting from this trend because the company has failed to adapt to the growing popularity of online game downloads, which now make up 83% of video game sales. While GameStop does engage in some digital sales, the company's market share pales in comparison to Steam, which controls 75% of the market for PC game downloads.

Overall, GameStop's business model is broken, and it could be a silent wealth killer for investors who add the stock to their portfolios.

10 stocks we like better than Carnival
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Carnival wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of August 1, 2020


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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More