When a stock is heavily shorted, it’s a very bearish sign. It means that a large number of investors are betting on the stock’s price falling in the future. In the case of Cineworld, the most recent data showed that it has a short interest of 9.5%. This makes the cinema operator the most shorted stock in the UK. So, does this mean that the Cineworld share price is set to decline further, or after its 27% yearly decline, can it recover?
Risks of Omicron
The Omicron variant has put the company’s future into doubt, and over the past month, the Cineworld share price has declined 30%. This is mainly due to fears that demand could be hit. At worst, there’s also the prospect of another lockdown, which could hit the company hard. But is this large share price decline warranted?
The ideal situation for the company is that demand can continue recovering, despite the risks posed by Omicron. This would continue the trend seen over the past few months, with cinema bookings hitting their highest level of growth since October 2019. It even managed to generate positive cash flow in October, and group revenues were 90% of 2019 levels. If similar momentum can continue, I feel the Cineworld share price could soar.
But this is a big ‘if’. Indeed, restrictions have already been announced in response to the new variant, and this includes compulsory wearing of masks in cinemas. This may lessen the appeal of cinemas, and lead to people staying at home once again.
Further, if there’s a new lockdown, the results could be disastrous. This is especially true considering the company’s extreme levels of debt. In fact, in this scenario, insolvency wouldn’t be out of the question. This risk is the reason why the shares have dropped so much recently.
The debt situation
Even before the pandemic, Cineworld’s debt position seemed pretty unsustainable. Yet at least it was profitable then. But operating losses in the first half of the year totalled over $200m. And debt has also continued to soar. In fact, net debt currently totals $4.6bn, far greater than its current market capitalisation of around $700m. As such, even if it’s forced to issue more shares to pay off some of this debt, this is unlikely to make much of a dent in the total. There are also several forthcoming interest payments, and if the company can’t return to profitability, default is a possibility. This could result in insolvency and even see the Cineworld share price fall to zero.
Has the Cineworld share got further downside?
In the case of another lockdown, I believe that the Cineworld share price will fall a lot further. This is one reason why I think it’s so heavily shorted.
But there’s also the chance for the shares to soar. Indeed, before Omicron, the recovery was progressing well. If this recovery can continue despite the emergence of the new variant, I believe the upside potential could be huge. There could even be a short squeeze. I’m not going to buy though, until I can see more evidence that a new lockdown isn’t coming. This is because the risks seem too great right now.
