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

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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).

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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.

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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.

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