Fear a ‘dead cat bounce’? I’d avoid this dirt-cheap FTSE 250 stock

This FTSE 250 (LON:INDEXFTSE:MCX) stock has tumbled in recent weeks. Paul Summers thinks it’s a classic value trap.

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A ‘dead cat bounce’ can be defined as a temporary recovery in share prices before another swift bout of heavy selling takes place. Whether that’s what we’re seeing in the markets right now is, of course, anyone’s guess.

Should markets quickly give up the positive momentum seen over the last couple of days, however, there’s one stock I definitely won’t be interested in buying, regardless of how cheap it becomes.  

Off-screen drama

Since a trip to the movies involves sitting for hours in an enclosed space with popcorn-munching strangers, it’s no surprise the share price of cinema operator Cineworld (LSE: CINE) has been hit hard following the coronavirus outbreak. Yesterday, the stock closed at 140p — roughly 20% less than a month ago.

It’s certainly possible things could get worse before they get better. A decision by the UK government to restrict ‘public gatherings’ in the event of a huge rise in those testing positive would be extremely negative for the company. Closing cinemas would surely be required, as it was in China.  

Even if it doesn’t come to this, the ongoing disruption to the cinematic calendar is likely to impact earnings in the short term. Yesterday, it was announced the release date for the new James Bond film (No Time to Die) has now been put back from April to November. A couple of weeks ago, filming of the latest Mission Impossible installment was brought to an abrupt halt in Italy.

Temporary or otherwise, I’d still be reluctant to snap up Cineworld’s shares for another three reasons.

Loaded with debt

First, the amount of debt the company now carries as a result of its decision to buy US operator Regal and Canadian business Cineplex remains significantly more than the current value of Cineworld itself! Bar a few exceptions, I’m not a fan of debt-laden companies at the best of times, let alone when markets are this fragile. 

Second, the popularity of streaming services, such as Netflix and Amazon Prime, shows no signs of falling (and is likely to soar if we’re all forced into self-isolation).  The arrival of Disney’s ‘Plus’ offering later this month will mean yet more competition for consumers’ eyeballs. Monthly subscriptions costing far less than a single trip to the cinema and offering a huge variety of content leave the FTSE 250 company looking very vulnerable, at least in my opinion.

Third — and arguably as a result everything mentioned so far — Cineworld continues to attract significant attention from short sellers (those who bet on a company’s share price falling). Right now, it’s the third most shorted stock on the London Stock Exchange, according to shorttracker.co.uk.

Highly-researched short sellers aren’t always right, but anyone owning stocks they target must be very sure of their reasons for staying positive. 

Worth a punt?

Full-year numbers from Cineworld are expected on 12 March. Since these will relate to trading in 2019 only, it’s inevitable investors will be more focused on comments from management regarding the company’s outlook, in light of the coronavirus crisis.

At a little less than six times forecast earnings, you might argue a lot of negativity is already priced in. With everything so up in the air, however, I think Cineworld looks a classic value trap.

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 of the 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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