Cineworld (LSE: CINE) was one of the worst performing FTSE 250 stocks of 2021. But come 2022, and things seem to be going pretty well for the stock. It is still a penny stock, to be sure. But considering the rise of almost 40% it has seen in the past month, that might just be a thing of the past very soon if the trend continues.
I am already a Cineworld shareholder, who has long held it with great conviction, even though it has looked like a complete write-off many times during the past year. But even I did not expect this kind of increase and so fast. So I had to ask – what is going on here?
Cineworld share price rises while FTSE 250 falls
I am particularly curious considering that the FTSE 250 index, of which it is a part, has shown rather muted trends so far in 2022. It has even fallen below 23,000 since mid-January. Moreover, inflation is on the rise too. Cineworld’s biggest market is the US, which saw the biggest inflation print in 40 years recently! Cinemas and entertainment in general is a non-discretionary spend, the kind that’s the first to get slashed out of a household’s budget as prices rise and the real value of disposable income falls.
In my assessment, the stock price has risen in anticipation of better times ahead. Even though we do not know what might happen next with regards to Covid-19, at least we can be fairly sure that we are on the path to recovery. I think this is reflected in the Cineworld share price too, which had fallen a whole lot in the past year.
Robust trading update
Cineworld’s latest trading update has boosted the stock further. In December 2021, the company’s revenue rose to 88% of its 2019 levels. Performance in the US is particularly heartening at 91%, though its second largest market of the UK and Ireland is not much farther behind at at 89%. It also said that it has generated positive cash flow in the final quarter of the year, which to me sounds like a sure-shot sign of recovery. Moreover, a slew of promising films is expected to release this year, which could further reinforce its performance.
What I’d do
In sum, it appears that there are still drags on the Cineworld share price. But there are also factors pushing it forward. In fact, even big risks like inflation might not impact the stock right now as it is a relatively low-cost entertainment expense compared to, say, taking a holiday. Only if inflation rises so much that it results in an economic slowdown would it impact the stock. And with all the policy tools we have, I would be very surprised if that happened.
My point is, that I am still quite optimistic about the Cineworld stock even with the risks to it. I am holding it for now, and would probably even have bought it now, if I had not already.
