Cineworld (LSE: CINE) became one of the main ‘reopening’ stocks on the London Stock Market. And the share moved from lows around 20p in March 2020 to a peak just above 120p this March.
The Cineworld share price has been volatile
But the path of the stock wasn’t straight up. And that’s not surprising given the challenges caused by the pandemic. However, the company’s screens finally reopened around the world during April and May.
Nonetheless, the share began to plunge in March and ended up more than 50% lower last week. And I reckon that move was directly related to the resurgence of Covid-19.
Since the start of the stock’s fall, it’s been emerging that economic recovery from the pandemic will likely be messy. So that big idea about investing in so-called ‘reopening’ stocks for a v-shaped recovery now seems flawed. Indeed, we’ve seen weakness in other reopening stocks as well, such as Saga, Go-Ahead and International Consolidated Airlines, among others.
In the case of Cineworld, I reckon investor sentiment turned against the company because of the perception that restrictions may continue or be reinstated.
But, on top of that, it’s still unclear whether customers will return to the big screen in previous numbers. And the film industry itself has been battered and less-productive. So there are fewer big new film releases to attract customers.
The stock’s been bouncing
Despite all those concerns, the share price staged an impressive bounce on Friday. Is that a signal to buy the shares? After all, contrarian investors would likely recommend buying stocks near their lows when the bad news is at its worst.
I’m not. It’s possible the stock could surge higher from where it is today. And the business could gain traction with a long and steady recovery.
But, to me, this isn’t a cheap share, it’s a stock with a damaged underlying business. So, rather than thinking of it as a reopening stock, I’d consider it a recovery situation. But I’m not keen on those.
Top investor Warren Buffett once said that, in his experience, “turnarounds seldom turn.” And that’s why he focuses on buying quality businesses at decent valuations.
A focus on quality and value
Meanwhile, Cineworld strikes me as a company struggling to keep the lights on as it juggles its finances. The battered business is a very long way from being a quality operation in today’s economic and pandemic-racked environment. Indeed, Buffett himself turned his back on the airline industry when the pandemic hit by selling his shares in the sector.
Right now, I’m cautious about most shares. It seems to me that the investor enthusiasm for reopening stocks is declining. And the reality of the economic fallout from the pandemic is beginning to bite.
So, for me, it’s even more important to focus on the enduring factors of quality and value in underling businesses. And to pick shares very carefully. Today, Cineworld doesn’t make my ‘buy’ list, despite the bounce in its share price.
