Cineworld (LSE: CINE) shares are trading below 100p. This makes it a UK penny stock. But is it worth buying at its low price? I don’t think so, hence I’m steering clear of it for now.
The UK penny stock has been volatile. Since the beginning of the year, the shares are up over 45% but they’re down 9% during the past 12 months. And I reckon this volatility could last, at least in the short term.
I’ve been bearish on Cineworld shares for a while. But as this company has been a victim of the pandemic and lockdown restrictions are easing, I think it’s worth revisiting the investment case for it.
Bull case
As I mentioned, Covid-19 restrictions are easing in many economies. This is clearly a positive for Cineworld shares and explains why the stock has rallied in 2021 so far.
The FTSE 250 firm gave an update at the end of May and said it was “pleased to report a strong opening weekend in the UK, led by the success of Peter Rabbit 2: The Runaway”.
Cinemas in the US have also reopened. In fact, 97% of its sites there have resumed operations. This again is good for the stock as recent film releases such as Cruella, and A Quiet Place 2 have performed well at the box office.
To me, this highlights a few things. The first is that clearly there’s an appetite among consumers to go out and watch a movie on the big screen. And secondly, if future film releases are well received, this should act as a tailwind for the UK penny stock in the short term.
The company states that combined with increasing consumer confidence and the vaccine rollout, it expects “a good recovery in attendance over the coming months.” And I’d agree with this statement.
Bear case
It’s not all rosy though. The stock is still heavily shorted, with a short interest of 7.4%. This means that investors are betting that the share price will fall. It also means that they’re bearish on the company. In fact, Cineworld is the second most shorted stock in Britain, according to shorttracker.co.uk.
This makes me somewhat nervous about dipping my toe in. The penny stock could face pressure from short-sellers, which could impact the share price. This is one reason why I’m not buying just yet.
And while the company may have issued a positive trading update, I’m waiting for the actual numbers and a breakdown of its performance. At the moment, I don’t have the information to make an informed investment decision on the stock.
I’m also worried about Cineworld’s debt pile. As of the end of 2020, this stood at $8.3bn. If there’s another lockdown, I’d be concerned at how it’s going to afford its existing liabilities.
To put it in perspective, the company’s net debt exceeds its current UK market cap of £1.2bn or $1.7bn by a considerable amount. This doesn’t make sense to me from an investment point of view.
My view
For now, I’ll be watching this share closely. All things considered, I’ve some concerns about Cineworld shares. But I’m not happy with the risk/reward ratio from this stock and hence I won’t be buying just yet.
