Like much of the London market, Cineworld (LSE:CINE) shares have jumped in value over the last few days, thanks to great news on a potential vaccine against coronavirus. Might my hitherto bearish stance on the cinema operator actually turn out to be the biggest mistake of my investing lifetime?
Well, let’s start by looking at a couple of reasons to be optimistic that people will flood back to the silver screen.
Cineworld shares: reasons to be cheerful
First, there’s the novelty effect. Convenient as streaming services such as Netflix and Amazon Prime are, holders of Cineworld shares will surely argue that there’s nothing quite like watching the latest blockbuster in all its visual and auditory glory. Having endured two lockdowns, a trip to the cinema will almost feel like a new experience, in the same way as taking a holiday abroad might.
Second, we know there’s a truckload of blockbusters on the way. New Bond and Batman films, the Top Gun sequel, Wonder Woman — the list goes on and on. And, make no mistake, film studios will be chomping at the bit to ‘green light’ productions once it’s safe to do so.
Based on the above, demand for cinema tickets looks set to increase. However, we need to put things in perspective.
Awful investment
For one, we’re not out of the woods yet. Distributing the vaccine will take time and patience is not something many in the market are blessed with. It is, therefore, quite possible that Cineworld shares will resume their downward descent as people get bored, bank profits and seek out their next target.
The number of traders still betting against Cineworld also needs highlighting. Even after this week’s stonking price action, the company remains the most shorted stock on the London Stock Exchange. One reason for this enduring pessimism is the shocking state of its finances.
To be clear, Cineworld’s problems extend far beyond simply selling popcorn and getting ‘bums back on seats’. With a huge debt burden, it seems likely it will seek more cash from its owners at some point. To paraphrase top fund manager Terry Smith, I prefer companies that pay me rather than the other way around.
And that jump in the share price? Go back to the beginning of 2020 and Cineworld shares were trading at 220p a pop. Regardless of this week’s move, it’s still been a staggeringly bad investment for loyal holders.
Steering clear
Now, I don’t doubt it’s still possible to make money from Cineworld shares over the next few months. In the absence of a crystal ball however, this will surely depend far more on luck than anything else. Right now, Cineworld’s a gamble, a ‘punt’. This isn’t the Foolish way.
Nope, we see investing as a long-term pursuit. We’re focused on buying great companies at decent prices and holding them ‘forever’. Even when they get in a sticky spot — and all businesses will — we’re confident they’ve the products or services, growth opportunities and financial firepower to recover.
As someone still struggling to put Cineworld in this camp, I’d encourage prospective buyers to look beyond the share price. Instead, look at the underlying business. Is this something that’ll thrive for years to come? I still need convincing.
