Even though the S&P 500 is near record territory, it doesn't mean that all businesses have seen their shares reach all-time highs in recent times. Some stocks are still significantly below their high-water marks.

Look no further than Carnival (NYSE: CCL). As of this writing, shares are 79% below their peak.

It's no surprise that the company was decimated during the height of the pandemic as its operations were halted to stop the spread of the virus. However, this cruise line stock was down 23% in the 24 months before the start of 2020, indicative of ongoing investor pessimism.

Since it trades at a forward price-to-earnings (P/E) ratio of 15, significantly below the market, is this cheap stock a no-brainer buying opportunity right now?

Strong momentum

Carnival deserves some serious credit for how it is turning things around. The economic reopening, and consumers showing greater interest in spending on experiences versus goods, are propelling the business.

During the first quarter (ended Feb. 29), Carnival reported record revenue of $5.4 billion, which represented a 22% year-over-year increase. This was boosted by strong bookings and deposits at an all-time high, despite higher prices.

The fact that profitability is heading in the right direction is also an encouraging sign. While the company posted a net loss of $214 million, it marked a notable improvement from the $693 million net loss in the first quarter of fiscal 2023. Wall Street analysts believe that the company will generate positive earnings for the full fiscal year.

In the midst of a fundamental recovery, Carnival shares have climbed 44% just in the past 12 months. But that hasn't done enough to prevent the stock from trading at a discounted valuation.

The potential risks

Your immediate thought might be to add Carnival to your portfolio without hesitation. The business appears to be doing well, seeing strong demand, and improving its bottom line. Plus, it helps that the forward P/E is compelling.

But I think that would be a mistake. I believe Carnival remains is a risky stock.

The company generated record revenue in the first quarter, but demand is still sensitive to macro forces. You could argue that Carnival's robust financial performance in the midst of higher interest rates and inflationary pressures is a positive sign. But how will the business fare in a recessionary scenario, one that could still happen in the near term?

In this situation, it's easy to believe that Carnival would struggle. It's reasonable to think that consumers would hold off spending on these expensive trips when times get tough.

This points to how the company's massive debt burden, now at close to $31 billion, is still a reason to worry as well. What we're seeing now might simply be the direct result of pent-up demand for cruise travel, which could be short-lived. If demand starts to normalize -- or worse, if there's an economic downturn -- Carnival might have trouble servicing its debt.

That's a risky scenario fraught with uncertainty that I'd much rather avoid.

A disappointing voyage

Since its initial public offering in 1987, Carnival has generated a total return that pales in comparison to the S&P 500. Of course, investors shouldn't just extrapolate past results into the future. If there are significant fundamental changes happening with the business that warrant a more bullish outlook, then perhaps that can help lead to stronger investment returns.

In this case, however, I don't see much reason to expect things to turn around. And I'd be surprised if Carnival's returns over the next decade and beyond come anywhere close to outperforming the broader S&P 500. Therefore, I'm not buying this stock, no matter how cheap it looks.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

1 Cheap Stock Down 79%: Is It a No-Brainer Buying Opportunity? was originally published by The Motley Fool