It’s not hard to see why investor interest in the firm is high right now. Year to date, the Cineworld share price is down around 80% due to the coronavirus. This share price fall is attracting value hunters.
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Should you follow the herd and pile into the shares in the hope of a rebound? Let’s take a look at the investment case.
Can Cineworld’s share price rebound?
Earlier in the year, cinemas across the world were forced to close after governments imposed lockdowns to prevent the spread of the coronavirus. Cineworld closed its entire estate of 787 cinemas in 10 countries.
Now, however, cinemas are slowly reopening. Here in the UK, Cineworld’s cinemas in England and Wales are open. Cinemas in Ireland, Jersey, and Scotland are expected to open from 26 August.
Meanwhile, in the US, Regal Cinemas (which Cineworld owns) has said it plans to reopen its locations on 21 August. This is an encouraging development for Cineworld.
However, the reopening of its cinemas may not be straightforward. Firstly, the company needs to convince customers to come back. In Europe, where the group has already been able to open some cinemas, customers have been slow to return.
Secondly, another wave of Covid-19 – the number one risk fund managers are concerned about – could completely derail the group’s progress.
So the way I see it, the case for the shares ultimately comes down to what you believe will happen with Covid-19.
If we see a vaccine in the near term, there’s a good chance Cineworld’s share price will rebound. If we see a second wave of Covid-19, however, the shares could crash lower.
Debt adds risk
It’s worth noting that Cineworld has a large amount of debt on its balance sheet. As of 31 December 2019, the group had net debt of $3.5bn on its books.
This certainly adds risk to the investment case. Ratings agency Moody’s has a ‘negative’ outlook on the stock.
Hedge funds are bearish
It’s also worth noting that the firm is the second most shorted stock on the London Stock Exchange at the moment. Currently, short interest stands at a high 9.5%.
This means that hedge funds and other sophisticated investors are betting heavily against the stock. These investors expect Cineworld’s share price to continue to fall.
Meanwhile, only two insiders have purchased Cineworld shares since March. They were Chairman Anthony Bloom and Non-Executive Director Eric Senat, who both bought stock on 18 March. No other insiders have purchased shares since then.
A speculative investment
Putting it all together, I see the shares as quite risky right now. Cineworld’s share price could bounce back if we see a coronavirus vaccine in the near term. However, it could just as easily fall if we see a second wave. So it’s a rather speculative play.
All things considered, I think there are better UK shares to buy right now.