Cineworld (LSE: CINE) shares are up again, after their recent plunge. In late August, the Cineworld share price fell to a low of 1.8p. Then, this week, it was back to nearly 6p.
At market close Tuesday, the shares ended at 3.9p, still more than twice their low point.
If Cineworld is rising from the ashes, are we looking at the kind of stock recovery that had seemed so far out of reach?
Cineworld’s shock warning revealed it’s in severe financial trouble. A lack of movie blockbusters, people not flocking back to cinemas, and sufficient revenue is just not coming in.
We heard that any deleveraging rescue package would “result in very significant dilution of existing equity interests in Cineworld“. Bankruptcy is also one possible way.
All sorted?
So done and dusted. Find a rescuer who wants the assets, sell out and pay off debt. Nothing left for existing shareholders. Or, at least, that’s what many investors assumed.
But clearly someone has been buying again, pushing Cineworld shares back upwards once more. I can think of a few reasons why investors might do that.
Firstly, when the stock market responds to a major story, it usually overreacts. And when there’s bad news, the rush for the exit often leads to overselling and a share price falling too far. It can then even up and find its new level in the coming weeks.
Fair value?
So maybe institutional investors have done their sums and come to the conclusion that the higher price represents a fair valuation for Cineworld shares. When the company spoke of dilution, that was before the share price crashed.
So perhaps, after checking all the assets and debt on the balance sheet, it looks like today’s price already represents the most likely level of dilution.
Some could be thinking that the board was preparing us for the worst. And maybe a rescue package will be found that leads to less dilution than feared. We haven’t heard any more news on an attempted financial bailout yet. So might optimistic investors think no news is good news?
Board holdings
There’s been another minor twist in recent days. The company has confirmed that the Greidinger family have beneficial ownership of approximately 20% of the issued share capital of Cineworld. Mooky Greidinger is CEO and Israel Greidinger is deputy CEO.
That, presumably, helps align the interests of the Greidingers more closely with the interests of private shareholders. Might it mean there’ll be extra impetus in finding a deal that’s as kind to shareholders as possible?
I know I like to see board members having significant holdings in companies I invest in. I think it helps keep us all on the same side.
Penny shares
I really don’t know if any of this has any bearing on what might happen next. And I see one major caution. With a small-cap stock down in low penny share territory, it doesn’t take much buying or selling to influence the price significantly.
So I’d be wary of reading too much into these recent movements. Would I buy now? No, because nothing has really changed. And I don’t buy on speculation and guesswork.
