Stock market crash: I’ll avoid this one cheap share but another looks promising

Andy Ross looks at two potentially cheap shares that have been hit by the stock market crash and wonders if they might make investors big returns in the coming year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Even though the stock market crash took place back in March, the FTSE 100 is yet to recover. Especially after this week’s sharp falls. This means there are still opportunities for investors to pick up bargain UK shares. However, as always with cheap shares, there’s a need to watch out for the ones that may be on a slippery downwards slope that won’t stop sliding – perhaps until an abrupt end. Like Carillion.

One company I don’t see much room for a recovery from is the indebted cinema chain Cineworld (LSE: CINE).

The stock market crash can’t even tempt me

Cineworld wasn’t doing well pre-covid. The pandemic, especially if it goes on much longer, could see the share price fall further. That’s despite it falling already for most of the past 18 months.

The big problem the chain faces is debt. Management sought to scale up the business pre-pandemic by making huge acquisitions. Any experienced investor will tell you though that leverage will work against you in bad times. Unfortunately just as the balance sheet is creaking under debt, we’ve hit tough times, especially for non-essential businesses like cinemas.

All hope for the share price now seems to rest in a takeover by a Chinese tycoon who has built up a stake approaching 10% as the shares have fallen. I think shareholders will be very lucky to make any money even if the company is taken over.

It doesn’t seem realistic to think a premium will be paid for the shares when the industry, and the company specifically, face so many problems. For me, Cineworld is a share to avoid. That’s even after the stock market crash has made the shares look very cheap.

One share that could have a swift recovery

Rank (LSE: RNK) has also been hit hard by covid because its bingo halls are typically frequented by older customers who are more vulnerable to the virus. Unlike Cineworld however, its shares were doing quite well pre-pandemic.

The group’s share price was performing well pre-covid because Rank management had lifted profit expectations. The transformation programme was going well and digital revenues were rising. Fortunately, the latter are still doing fairly well in this environment. 

Its online operations may well help it through this difficult period when bingo halls and casinos are understandably struggling. Indeed digital net gaming revenue rose 23%. A lot of savings have been found to cope with the impact of less customer visiting premises.

Longer term a focus on digital, which the pandemic necessitates, may help the business grow its online revenues even quicker. This would be a real upside for investors, as digital businesses tend to be more popular and higher rated by the market.

In a better environment post covid will customers return to bingo halls and casinos? I think yes. This is why the stock market crash may have created an opportunity for investors.

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.

Andy Ross 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.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 UK shares could help me reach £1,000,000 in my Stocks and Shares ISA

A FTSE 100 compounding machine and a FTSE 250 value stock are the UK shares Stephen Wright thinks could help…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

How I’d aim to transform an empty Stocks & Shares ISA into £1m of wealth!

There's never a better time to start investing in a Stocks and Shares ISA than today. Here's how I'd aim…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Investing £14,708 in this FTSE 100 stock could earn me £1,000 per year in passive income

Is a CMA investigation into anticompetitive practices the cloud cover Stephen Wright needs to start buying shares in a FTSE…

Read more »