The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Carnival (NYSE: CCL).

Grin and bear it
One of the best things about living most of my life in Miami is that I was introduced to cruise ships at an early age.

I love cruising. I try to set sail once a year or so. I know all of the players well.

Carnival's namesake brand is the industry's mass-market vehicle. It's an entry-level cruise line that caters to penny pinchers and first-timers. It's the Golden Corral of cruise ship lines, where passengers get a good bang for their buck as long as they're willing to sacrifice a little bit in quality for the sake of quantity.

Don't get me wrong. I'm no sea snob. I still go on the occasional Carnival cruise, and here's me enjoying the Chukka zipline in Jamaica as a shore excursion during a Carnival Destiny sailing last summer.

Carnival also isn't just a haven for the thrifty. It's also the company behind Cunard, Holland America, and The Love Boat's Princess. It's the world's largest player with a huge presence overseas (pun intended, yo). However, it's not the one cranking out the shiny new boats that everyone wants to sail on these days. Cruise fans want in on NCL's Epic, Disney's Dream, and Royal Caribbean's (NYSE: RCL) Allure of the Seas.

Despite its portfolio of global seafaring vessels, it still relies on its namesake value-priced brand to bring home the breakfast bacon. There's nothing wrong with that during the early stages of an economic recovery, but Carnival's position also makes it the most vulnerable to the recent spike in fuel prices because it's the audience that's least likely to absorb the hit.

You're already seeing it in this week's earnings report. Fiscal first-quarter earnings slipped 13% despite a nearly 8% uptick in revenue. It sees net income slipping by 25% to 38% in the current quarter. Ouch!

Higher fuel prices find Carnival whacking $0.45 a share off its full-year guidance since its initial read in December. Losses from itinerary changes in the troubled Middle East and North Africa regions are being offset by gains from a weakening dollar.

Carnival's new target of earnings per share of $2.55 to $2.65 this year is barely ahead of the $2.47 it rang up in 2010, implying a solid bounce during the latter half of this fiscal year. It seems overly optimistic, especially if global tensions and higher fuel surcharges scare away passengers.

Cumulative advance bookings for the remainder of the year are mixed, with cruisers willing to pay more but with slightly lower occupancy levels than where Carnival was a year ago.

Given the global political uncertainties and potential for oil prices to escalate, one has to wonder if Carnival's recent move to hike its dividend to the point where it's now paying nearly 40% of its projected earnings may be too much given its debt-saddled balance sheet.

I believe in the industry -- and even Carnival -- in the long run. I'm just not comfortable owning Carnival in the short run given the rocky seas in the horizon.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Steiner Leisure (Nasdaq: STNR): If you want to play the cruising industry without the fuel cost headaches, Steiner Leisure operates the spas found on 151 of the largest ships. Even cash-strapped passengers are unlikely to pass up the opportunity to get pampered once at sea, and Steiner also sells a wide line of proprietary beauty care products. Revenue and earnings climbed 30% and 18%, respectively, in its latest quarter. Steiner also trades at 14 times this year's projected profitability, a smidgeon less than Carnival's multiple of 15 based on the midpoint of this week's guidance.
  • Six Flags (NYSE: SIX): If overseas turmoil and pain at the pump keeps summer vacationers closer to home regional amusement park operators Cedar Fair (NYSE: FUN) and Six Flags will be major staycation beneficiaries. This isn't the same Six Flags that filed for bankruptcy two summers ago. The shares have already nearly doubled since emerging from bankruptcy reorganization 10 months ago with a markedly improved balance sheet. Unlike the red-inked thrill ride Six Flags used to be, today's riders are hopping on a company with healthy and growing profitability projected over the next couple of years.
  • Disney (NYSE: DIS): My sister just got back from sailing on Disney's new Dream, and her entire family was blown away. We've gone on several treks together on Disney's two older ships, so her glowing endorsement for the family entertainment giant's third vessel isn't something that I'm taking lightly. Disney also has a well-rounded leisure empire for landlubbers, complete with the world's most popular theme parks and a portfolio of some of the most recognized characters on the planet. Its latest quarter was solid, with four its five operating segments posting double-digit gains in operating profit.

I'm sorry, Carnival. I'm feeling just a little seasick.

Walt Disney is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story, except for Steiner and Disney. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.