The 1 Soaring Cruise Ship Stock Worth Watching Tuesday

Wall Street remained in a bullish mood, building a two-day winning streak as the Dow Jones Industrial Average (^DJI -0.11%), S&P 500 (^GSPC 0.02%), and Nasdaq Composite (^IXIC 0.10%) rose by around 3%. Investors are becoming increasingly convinced that monetary policymakers will have to reverse course and be less restrictive in their actions, potentially setting the stage for a reversal in the bear market.

Data source: Yahoo! Finance.

Some of the best-performing stocks in the market on Tuesday were cruise ship stocks. These beaten-down companies have seen relief recently, with big gains for Carnival (CCL 1.49%), Royal Caribbean Cruises (RCL 0.04%), and Norwegian Cruise Line Holdings (NCLH -0.77%). Yet among the cruise operators, there's really only one that has the best chance ever to get back to its previous record highs. Below, you'll learn which company that is and why it has an edge over its peers.

Sailing ahead

Investors have gotten used to seeing cruise stocks move in lockstep, and today wasn't much different. Carnival posted gains of 13%, while both Norwegian and Royal Caribbean managed to outpace Carnival with gains of nearly 17% each.

Today marked the first day that Norwegian Cruise Line passengers didn't have to follow any COVID-19 testing, masking, or vaccination requirements. Citing "positive progress in the public health environment," Norwegian said that its guidelines are now "more aligned with other global travel organizations." That won't exempt the cruise line from following the travel guidelines of the destinations it serves, but it will presumably let some would-be cruise travelers return to the seas who otherwise wouldn't have been able to even come aboard.

Even with today's gains, though, cruise stocks remain roughly 70% to 90% below where they traded prior to the pandemic in late 2019 and early 2020. Moreover, because of one simple fundamental fact, there's only one of the three that stands even a decent chance of recovering all of its share-price losses anytime soon.

Avoiding dilution

That company is Royal Caribbean, and the reason why it stands out from the rest is that it's the only one of the cruise ship trio to avoid the full extent of massive dilution in its capital preservation efforts over the past few years.

Both Norwegian and Carnival resorted to issuing huge amounts of stock since the beginning of 2020. The need to raise capital was acute, because cruise ship operators were burning cash extremely quickly, being forced to idle ships as travel restrictions kept people off the seas.

As of their most recent quarterly financial reports, Norwegian's diluted outstanding share count had moved more than 95% above where it started 2020. Carnival wasn't too far behind, with a 73% increase.

However, in relative terms, Royal Caribbean was disciplined in its capital-raising activities. It now sports a share count that's only 22% higher than where it was at the beginning of 2020.

Not needing to play catch-up

The benefit of having fewer shares is that it won't take as much raw profit growth to generate the same amount of earnings per share. On one end of the spectrum, Norwegian will have to earn almost twice as much money to exceed its pre-pandemic profits on a per-share basis. Carnival will also have to exceed its 2019 earnings dramatically to produce the per-share bottom line investors want to see to justify higher share prices.

Royal Caribbean, on the other hand, has a lower hurdle to overcome. In the best-case scenario for cruise operators, that should send Royal Caribbean's stock higher at a faster pace than shares of its peers.

To be clear, cruise operators are far from out of the woods, and there's no guarantee that any of them will fully recover. If they do, though, you can expect to see Royal Caribbean in the lead.