You can't hop on a cruise these days, but folks are certainly hopping on cruise stocks. Shares of Norwegian Cruise Line Holdings (NASDAQ:NCLH) have nearly quadrupled -- soaring 282% as of Monday's close -- since bottoming out in mid-March. Industry leader Carnival (NYSE:CCL) (NYSE:CUK) hasn't fared as well, up 219% since its early April low. Then again, there's no shame in owning a stock that has more than tripled in a little more than two months.

These are challenging times for the cruise line industry. As great as the speculative climate has been these past couple of months, Norwegian Cruise Line and Carnival could double from here and still not be where they were back in January. They are volatile investments, but there are some pretty good reasons to go with Carnival over Norwegian Cruise Line at this point. 

The Haven outdoor area aboard an NCL cruise ship.

Image source: Norwegian Cruise Line Holdings.

Scale matters

Like most travel industries, the cruise line operators took a big hit in March, when COVID-19 forced most of the world into lockdown mode. Now things are starting to pick up. Hotels are starting to open up with new safeguard measures in place. Airlines are starting to add flights. But the cruise lines aren't going to start sailing again until August at the earliest, and that's still a long shot to happen. Roughly 60,000 crew members still need to be repatriated, and the Centers for Disease Control and Prevention needs to lift its No Sail Order. 

All three of the major publicly traded cruise lines raised billions shortly after their sailings were interrupted, and they're going to need it. Even when cruises start leaving the port with passengers, it won't be a very profitable voyage. 

Norwegian Cruise Line has the advantage of being nimble, but it also means more limited resources at a time when supply will outstrip demand. Carnival has $20.9 billion in trailing revenue, and it accounts for nearly half of the overall global cruise passenger market across its several brands. Norwegian Cruise Line is a distant third with $6.3 billion in trailing revenue. 

There will be a shakeout, making it risky to own a small player in this high-cost scalable industry. Scalability matters here, especially with the cruise lines likely to be facing passenger capacity restrictions and profit-zapping safeguards. Carnival's net margins have averaged 15.8% over the past four years, comfortably above Norwegian Cruise Line at 14.3%. We don't know when the industry will return to profitability, but it's a smart bet that Norwegian Cruise Line will be the last of the three players to get on track. 

There is a time to invest in the underdog. There's a time to buy into a niche player. Unfortunately for the cruising industry right now, it's time for investors to hang on to the most seaworthy players for the high waves that are coming. Norwegian Cruise Line and its peers dodged the first bullet by lining up financing to get through the next few rough months. They have also talked roughly half of the passengers on cancelled sailings into taking enhanced future cruise credit over cash refunds, a move that helps preserve liquidity now at the expense of weighing that cash flow down later. With near-term demand problematic and the country now officially in a recession, it's very risky to chase the smallest and least profitable player at this point. Carnival has its flaws, but it's the smarter bet for investors trying to get in at this point of a seemingly unsustainable rally.