Investors should buy cruise industry stocks due to attractive growth potential in China and cheap valuations, according to Bernstein, which initiated coverage on the leisure sector.
"Cruise is an attractive industry; one that is concentrated, with mobile inventory, rational supply growth, and strong demand characteristics," analyst David Beckel wrote in a note to clients Thursday.
The analyst cited how the current P/E valuations of cruise stocks relative to the S&P 500 are near the lowest levels in 15 years. The only other times the sector's relative valuation to the market was this inexpensive was after the 9/11 terror attacks and global financial crisis.
"We believe demand (led by the Chinese cruise market) will be more than capable of absorbing an accelerating supply of newer, bigger ships in future years," he wrote.
He forecasts Chinese cruise demand to grow at 30 percent to 40 percent a year through 2020 leading to 4 million to 5 million annual passengers in the Asian country from 1 million today. As a result, Beckel estimates the cruise industry will be able to grow annual earnings at a high-teens percentage growth rate for the next five years.
Here are Bernstein's top two outperform-rated cruise stock ideas.