Cineworld (LSE: CINE) has been a disappointment for investors like me in the past six months or so. Its share price has dropped by more than 25%. This has wiped out a substantial proportion of the gains made during the stock market rally that started in early November last year.
Between November 2020 and March this year, the Cineworld share price tripled, losing its penny stock status in the process. But even though it is still more than 40% higher than the same time last year, 2021 has been a largely forgettable one for the cinema chain operator. This, of course, ties in with its performance.
Covid-19 impacts the Cineworld share price
Continued uncertainty about Covid-19 trends has been one big reason why footfall in cinemas has not gone back to pre-pandemic levels yet. Even now, big movie releases have been held back until next year to allow the situation to play out fully. The company is also still loss-making and is highly indebted as well.
Despite these drawbacks, I have been bullish on Cineworld for a while. I bought the stock a few months ago and believe that it could rally in 2022, making it my contrarian pick for the year. Here’s why I think so.
I feel the trend of limited audiences in cinemas because of the pandemic could be about to change. I am encouraged by all the progress in managing it. We have vaccines, booster shots and advances in treatment for Covid-19 now, which have significantly reduced its threat. This could create greater confidence in the future, which in turn could allow cinemas to thrive in 2022.
Encouraging trading update
We are already seeing positive developments. In its trading update released yesterday, the company revealed that as of October this year, its revenues were back up to 90% of their 2019 levels. The UK and Ireland have seen particularly strong performances, with revenues exceeding 2019 levels. Its biggest market, the US, is also recovering, having achieved 80% of the earlier revenue.
And while it is true that releases of big potential blockbusters like Tom Cruise’s next Mission Impossible film and the Top Gun sequel have been pushed to the next year, the company is optimistic about the line-up for the rest of 2021. These include the likes of the superhero film Spider-Man, animation film Sing 2 and The Matrix Resurrections.
Positive markets and macros
I think Cineworld stock could also be supported by the overall buoyancy in stock markets. In the past year, the FTSE 250 index, of which it is a part, has risen by more than 3,000 points. The top-tier FTSE 100 index has risen by more than 1,000 points.
And the overall economic recovery is still under way. In 2022, growth in the US is expected to stay strong, despite recent reductions in forecasts. This is important for Cineworld because, as I was saying earlier, that is its biggest market, after its acquisition of Regal Cinemas a few years ago. I continue to be positive on its share price and plan to buy more of it now.
