Editor's note: Volatility has returned to the market with a vengeance...

As the deadly coronavirus spreads across the globe, investors fear what's coming next. The S&P 500 Index is down roughly 30% over the past month... with seemingly no end in sight.

This sell-off is on par with the darkest period of the 2008 financial crisis. Back then, the S&P 500 plummeted 30% in a one-month span from September 26 to October 27.

During the latest historic sell-off, it was critical to own some portfolio "insurance"...

Subscribers who followed our colleague and Stansberry's Big Trade editor Bill McGilton's advice closed three triple-digit winners in less than two weeks as fears soared recently.

In today's Masters Series essay – adapted from the March 13 and March 18 editions of our free DailyWealth e-letter – Bill highlights the major flaws with two of these companies. And as he explains, these companies will likely face more pain in the weeks and months ahead...

Finding No-Win Situations... And Riding Them to Triple-Digit Gains

By Bill McGilton, editor, Stansberry's Big Trade

Justin Raizk felt like a kid in a candy store.

He didn't have any money, but he could take home anything he wanted... an iPad, a Samsung television and camera, or new Bose speakers.

This was surprising – but welcome – news to Raizk. He had recently lost his house to foreclosure. His credit was destroyed. And when he walked into his local Conn's (CONN) department store to visit a friend working there, the last thing he expected was to walk out with a cart full of new electronics.

Conn's is a retailer of furniture, mattresses, home appliances, and electronics. It is known for offering excessive lines of credit to people who can't afford them. In fact, its business was built around providing in-house financing to subprime borrowers just like Raizk.

But by doing this, subprime lenders like Conn's have also mired themselves in a no-win situation. And if you know this, it's possible to profit from their demise.

I'll give you the details today. But first, back to our story...

Not long after Raizk entered the store, a sales associate asked him if he was interested in a line of credit. Raizk doubted anyone would give him credit, but he didn't see much harm in filling out an application.

Within a short time, the sales associate returned and congratulated Raizk on qualifying for an immediate $14,000 line of credit. Raizk was shocked. His credit score was abysmal. As Raizk said, "I assumed that nobody would offer me credit for something like seven to 10 years."

Over several visits, Raizk racked up $3,000 in debt. He agreed to pay it back over 32 months at an annual interest rate of 25%.

You can guess what happened next...

Raizk fell behind on his payments. He lost his health care coverage at work and had to pay more out-of-pocket expenses for health insurance. As a result, he could no longer afford the payments to Conn's for the electronics he purchased. A column in the New York Times called "The Haggler" described Raizk's plight in 2014.

This is typical in the world of subprime lending. People with poor credit histories overextend themselves by buying rapidly depreciating assets. And to make matters worse, they agree to pay high rates of interest for things they can't afford to begin with.

Conn's underwriting got so loose that it has been a defendant in several lawsuits. It extended credit to people with credit scores as low as 400. That's about as low as you can go... Credit scores range from 300 to 850. And Conn's routinely provided credit lines up to $10,000 for "thin files" – people with no credit history at all.

It hired a "Dream Team" of 10 to 15 experienced salespeople to travel around the country and help new locations make their $1 million monthly sales quota. The Dream Team automatically approved credit lines to high-risk borrowers and then encouraged them to max out their new credit lines.

And to top it off, former employees claim management encouraged them to add credit insurance without customer knowledge as part of financing arrangements. Raizk says his charges included $215 for credit insurance that he wasn't aware of when entering into the financing arrangement.

We've covered subprime lenders many times in our Stansberry Research publications. And I've been paying close attention to them in my research.

It's a big story – and I won't go into all the details today. But the key thing to understand right now is this... In a financial crisis, subprime borrowers are typically the most exposed to the downturn.

They're the first to experience job cuts, and they have the least amount of savings to fall back on.

When I brought Conn's to the attention of my subscribers in 2018, 80% of its customers were below-prime credit – with credit scores ranging from 501 to 650. This included 37% less-than-prime, 35% subprime, and 8% deep-subprime. And almost 30% of Conn's customers were not paying as agreed.

Worse, the company had a policy of "re-aging" loans – or modifying or delaying loan payments for customers who are having trouble paying. Conn's doesn't consider "re-aged" loans delinquent. It's a game a lot of dubious subprime lenders play to make their loan portfolios look better.

Altogether, nearly a third of Conn's $1.5 billion loan portfolio was made up of folks who were either not paying, or having trouble paying.

Re-aged loans just "kick the can down the road." Similar can kicking triggered the last financial crisis. Back then, it was called "extend and pretend." Either way, the customer isn't paying as agreed.

And while interest rates are falling today, the easy money can't continue forever. As interest rates rise, non-payment will only get worse in the future for companies like this.

Conn's core customers are simply not able to support its business. When forced to prioritize their bills, paying Conn's back for appliances, furniture, and electronics is close to the bottom of their list.

Like other subprime lenders, Conn's is cornered. It has to choose between two bad alternatives:

1. Tighten its underwriting standards by being more choosey with the money it lends... and watch sales fall.

2. Or continue financing risky borrowers like Raizk... and watch the debt blow up down the road.

It's either falling sales or higher loan losses.

Subprime lenders like Conn's are in a no-win situation. And it's only a matter of time before their customers can't pay back their loans in large numbers... and one company after another blows up.

Meanwhile, Discounts Won't Save These Fragile Stocks

In 2009, Shirlee Yeary and her husband were ready to give up.

The recession was taking a toll on the Chicago couple, and previous luxuries – like an annual winter vacation – seemed unlikely. They just couldn't risk a large or unnecessary expense in such an uncertain economy.

So when their travel agent suggested an extravagant cruise, Shirlee was shocked.

At the time, cruise line Royal Caribbean Cruises' (RCL) premium segment Celebrity Cruises was offering a steep discount. For $1,100 per person – almost half the usual price – Shirlee and her husband would get a weeklong cruise on a brand-new ship, plus amenities and extras like a private balcony, complimentary champagne, daily hors d'oeuvres, and preferential treatment on shore excursions.

It was such a good deal, they couldn't refuse. So they jumped at the offer.

In a 2009 Time magazine article, Shirlee noted, "It seems they have to [offer some crazy discounts] to keep ships afloat in this scary state of affairs." She was exactly right.

With fears of the new coronavirus running rampant, the dramatic crash we're seeing lately has hit travel and tourism hard... And you might be tempted to think the carnage in cruise stocks is a one-off occurrence.

But that's not the case at all. You see, these fragile stocks are particularly vulnerable to recessions and drops in the stock market. Let me explain...

Cruise ship operators like Royal Caribbean are at their best during a booming economy. People are employed, have access to credit, and feel "wealthy." They're not afraid to spend money on a cruise.

Consumers have less cash to spend in a recession. Businesses earn less and make cuts, unemployment rises, home values and stock portfolios decline... and consumers cut back even further on spending. Nonessentials, like vacations, go out the window for many folks.

Cruise lines can't just park a portion of their fleet and wait out a recession. Whether they're full of passengers or not, ships require expensive maintenance to stay operational. Fuel, insurance, administrative, and payroll expenses hardly budge with a lighter passenger load.

So they lure passengers onboard with steep discounts that are hard to refuse.

During the last recession, a seven-day cruise to Alaska (normally more than $2,000 per person) was going for $499 per person on Holland America and $399 per person on Carnival (CCL). A four-day trip from Miami to the Bahamas (normally around $1,000 per person) was going for $200 per person on Norwegian Cruise Lines (NCLH).

Once the passengers are onboard, the cruise lines nickel-and-dime them with extras like alcohol, specialty restaurants, and gambling. On paper, it sounds like a decent strategy. After all, cruise lines generate almost a third of their sales from onboard spending. And the deals are fantastic for the customers. But it doesn't work.

Even with these massive 75% to 80% booking discounts, onboard traffic fell at least 25% across the industry in 2009. Royal Caribbean's sales fell 10%. That might not sound like much, but it only takes a small decrease in sales to crush its profits... Sure enough, profits fell 75% in that same year.

Cruise ship operators sell off hard in a recession. Royal Caribbean was no exception. By early 2009, its stock had collapsed to just $6 a share, down almost 90% from $44 per share two years prior.

Now, the cycle is repeating itself.

The coronavirus has already hit cruise stocks. Travel restrictions are going up worldwide.

Royal Caribbean, Carnival, and Norwegian Cruise Lines all halted U.S. cruises for 30 days. These three stocks have already fallen roughly 80% from their recent highs.

Not only that, but with the fallout we'll see from the coronavirus, some economists believe we're headed for recession (if we're not in recession already). That's bad news for cruise stocks.

Like the guy who lost his job but still has to come up with the mortgage payment each month, the clock is ticking before the house goes into foreclosure. It's the same thing with cruise stocks...

These businesses have billions of dollars in debt. With no money coming in, there's a real possibility that all three will go bankrupt.

And the longer the fallout from the coronavirus outbreak continues, the more the odds increase of that happening.

Good investing,

Bill McGilton

Editor's note: Bill closed recommended trades on Conn's and Royal Caribbean for triple-digit returns over the past few weeks. And on Thursday night, he hosted an emergency briefing to reveal all the details about his "portfolio insurance" strategy. It's an essential way to protect your wealth in times of crisis. If you missed Bill's event, that's OK... We're making a replay available for the next few days. Watch the FREE replay right here.