The Cineworld (LSE: CINE) share price has dropped 20% in the past month. Its fall is an even more spectacular 75% compared to the one-year highs it saw just a few months ago in March.
Since cinemas have reopened in both the US and the UK, where Cineworld operates, this is a curious development. I could understand investor nervousness when there was no end in sight for the pandemic. But now that we are increasingly out and about and there has been no material update from the company itself since May, the sharp fall in its share price looks like a contradiction.
Stock rotation in action
I do believe, however, that there are reasons to be found when we look at the bigger picture. The trend of falling share prices is visible across stocks. Consider the Lloyds Bank share price, which touched a one-year high in early June, and has fallen since. Or the FTSE 250 airline easyJet share price that was at its highest levels in a year in May, and has fallen 19% since.
It would be tempting to think that this is only the case with reopening, or soon to reopen, stocks, but that is not the case either. FTSE 100 mining biggies like Anglo American and Rio Tinto show a similar pattern in the past few months. And the outlook for metals has been bullish for the past year now.
This backdrop indicates that investors are probably selling off stocks that rallied in the past few months. And that there is a stock market rotation back to those that have struggled in the recent past, a reversal from the trend seen in November last year. As examples consider the AstraZeneca share that languished for months before it started rising again in March and continues to do so. A similar story is visible for the FTSE 100 utility Severn Trent.
Persistent pandemic
I also believe that some persisting uncertainty about the pandemic could be weighing on investor sentiment. Sure, we have come a long way. But there is still a possibility that we could go back to some restrictions even now. And who knows how that will impact already vulnerable stocks like Cineworld.
What’s next for the Cineworld share price
I reckon though, that the Cineworld share price can rally from its current abysmal levels again. In fact, I am enough of a believer in the stock to have bought it and now I will buy more of it at a lower price. Here is why.
First, the nature of stock rotation is such that it comes back to beaten down shares over time. The same can happen in this case. Next, the cinema chain’s results are due next month, which should show some improvement over the past year. Of course it goes without saying that weakness will still be visible, as a legacy of the pandemic, but I reckon it can indicate hope for the future. That can build confidence back up in the stock.
I maintain that it is a buy for me.
