Time to dump these high-flying stocks?

Paul Summers asks whether recent share price weakness is a sign to take profits on these two mid-cap stocks.

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Warren Buffett’s ideal holding period may be “forever” but many investors would argue that refusing to take at least some profit over time can be detrimental to a successful career in the stock market.

With this in mind, has the time come to sell leisure stocks Cineworld (LSE: CINE) and Rank (LSE: RNK), both of which have seen their share prices lose momentum over recent weeks? Here are my thoughts.

Stay the course

Since reaching a high of 740p a couple of months ago, shares in £1.9bn cinema operator Cineworld have come off the boil. That’s despite the company’s last trading update being uniformly positive.

From January to May, Cineworld managed to grow revenue by 15.8% on a constant currency basis, driven largely by a strong film slate that included Beauty and the Beast, The Lego Batman Movie and Guardians of the Galaxy Vol 2.

The company saw strong admissions growth across its estate, with the UK, Israel, Romania and Slovakia markets doing particularly well. A near 20% rise in retail revenue was also seen, thanks in part to the company’s decision to open more Starbucks outlets and VIP sites at its cinemas. 

So, why the dip?  

In addition to some investors deciding to take profits after such a stellar run, there’s also the possibility that August’s interim results won’t quite be as good as expected thanks to the recent warm weather and a spate of poorly-received recent releases (including the latest Pirates of the Caribbean and Transformers instalments). 

As a medium-term holding however, Cineworld remains attractive. Operating margins and returns on capital are consistently decent and levels of free cashflow look healthy. There’s also a forecast 3% yield available, safely covered by profits. Moreover, the schedule of film releases over the remainder of 2017 looks promising, with Star Wars: The Last Jedi, Thor: Ragnarok and Justice League likely to be big draws.

At 18 times earnings for 2017, Cineworld isn’t cheap. Nevertheless, I’m not sure taking profits at the current time would be wise.

Still bearish

As an investor, it’s always a good idea to admit one’s mistakes. My negative call on Mecca Bingo owner Rank following a fairly uninspiring set of interim results in January was way off the mark. Despite falling back slightly over recent weeks, the stock has still managed to climb 14% since voicing my concern over its poorly performing (but significantly large) retail division.

At a risk of sounding stubborn however, my thoughts on the company’s prospects haven’t changed. Based on its most recent trading statement, the physical casinos and bingo sites continue to be a burden, with like-for-like revenue declining by 1% and 2% respectively over the 46 weeks to mid-May. In complete contrast, digital revenue at the mid-cap grew by 13%.  

To be clear, Rank isn’t the worst investment out there. At 14 times earnings, the shares aren’t particularly expensive and there’s a fairly tempting 3.3% yield on offer to entice investors. Debt levels have shrunk noticeably over the last few years and, like Cineworld, Rank should also be able to survive the prevailing economic uncertainty thanks to the relatively lost-cost nature of the activities it promotes.

Nevertheless, with earnings unlikely to rocket anytime soon and a sizeable estate to maintain, I’d be tempted to take at least some money off the table.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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