Arguably the best cliffhanger at Cineworld (LSE: CINE) right now is not on any of the cinema chain’s screens. Instead, it involves the company itself. In early trading on Friday, the Cineworld share price was up over 50% compared to the day before! Despite this, the shares are still trading for just a few pennies each.
So is the Cineworld share price a bargain that could soar further?
Dramatic price action
Part of the issue when a share trades for pennies is that the price can swing wildly. We have seen that today with the Cineworld share price. But on a longer-term timeframe, the company has been a disastrous investment. Even after today’s movement, the shares are worth barely a 10th of what they were a year ago.
So although a share soaring by 50% may sound like an investor’s dream, for many shareholders Cineworld has been an unmitigated nightmare.
Where could the Cineworld share price go next?
What concerns me about the price movement today is that there is no obvious reason for it. The company did not issue any news that might improve its investment case, such as strong ticket sales, or a debt restructuring agreement.
This looks to me like the low price has attracted speculators to buy Cineworld shares. Some may be investors, but I think a lot could well be traders and meme stock enthusiasts. Financially on its knees but with a well-known brand, Cineworld is reminiscent of some other meme stocks including fellow cinema operator AMC.
But if nothing has changed at the company overnight, can it be worth 50% more than yesterday? On any rational calculation, I do not think so.
Outsized risks
Cineworld is in the process of trying to reach agreement to manage its enormous debt pile. We do not yet know what a final agreement will look like. But there is a fair chance that it will involve existing debtholders swapping at least some of their loans for ownership stakes in the company. That could mean existing shareholders see the relative size of their stake reduced, probably dramatically.
The business has been quite clear about this, telling shareholders last month: “Any deleveraging transaction will likely result in very significant dilution of existing equity interests in Cineworld”.
In other words, even if shareholders are not left with nothing, they could well be left with something close to nothing!
I’m ignoring the Cineworld share price
That means that no matter how wildly the Cineworld share price may move around, I will not be touching the stock with a bargepole. I do not see the share price as a bargain so much as a possible value trap.
Cineworld has thousands of sites and a well-known brand. That could help it grow its revenues again. But it has a huge debt burden and has signalled that shareholders may suffer badly as it attempts to improve its balance sheet. Buying shares in such a situation is speculation not investment. For many shareholders, even if they only pay pennies per share, it could still end badly. I will not be among their number.
