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Cruise Stocks on Sale

Wall Street may have overreacted to recent misadventures.

Thanks to a spate of accidents at sea, it may be a great time to book a floating vacation at a bargain price. It may also be a good time to plunge into battered cruise-ship stocks.

Carnival Corp. (symbol CCL) and Royal Caribbean Cruises (RCL), the two biggest companies, have suffered under the glare of damaging publicity. From February 12 — when the severity of an accident in the Gulf of Mexico involving the Carnival Triumph became widely known — through April 5, shares of Carnival tumbled 14%, to $34. Over the same period, Royal Caribbean, fell 11%, to $32.

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Accidents aside, the industry’s long-term prospects are excellent. Cruises appeal to many aging baby-boomers, who see good value in floating theme parks. Cruise lines benefit from their flexibility; they can easily move ships to markets with the highest demand. And the business is capital-intensive — a new ship can cost more than $1 billion — which deters competition. "There are always going to be some shocks to the business itself, but it’s built in a way to handle those shocks and still be profitable," says Ken Kuhrt, a manager of Ariel Fund, which owns shares of Royal Caribbean.

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Given Royal Caribbean’s ability to avoid trouble, its stock’s decline is puzzling. The shares sell for 13 times estimated 2013 earnings, a good value for a company that analysts see delivering annual earnings growth of 16% over the next few years.

As for Carnival, investors may want to wait three to six months "to make sure the media noise and price discounting have been washed out," says Morningstar analyst Jaime Katz. "Then there could be a really interesting opportunity to purchase shares at a compelling price." Carnival sells for 17 times estimated profits for the fiscal year that ends in November. Analysts forecast long-term earnings growth of 14% a year.

Growth-oriented investors should consider Norwegian Cruise Line (NCLH, $29), a smaller firm that went public in January. Analysts think its ships can lure travelers with looser onboard scheduling (known as "freestyle cruising") and glitzy entertainment. They see earnings rising 31% annually over the next few years.

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