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2 leisure stocks I think you should avoid right now

Leisure stocks have been viewed differently to other stocks during this current lockdown. With no trading taking place and no idea what trading will look like in the future, share prices have been affected massively. Surely it would be foolish to invest in such stocks? Or could some of these be contrarian buys?

Leisure stock #1

Cineworld (LSE:CINE) was forced to close all its UK sites back in March. Many other countries have also closed cinemas, including the US, where Cineworld derives 75% of its revenue with its Regal brand. The market crash caused Cineworld to lose nearly 70% of its share price value. 

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The temporary closure of Cineworld’s sites is not my primary concern. I’m more worried about that the cinema-going experience will look like post-lockdown. With no clear government guidance yet around such leisure activities, there is significant uncertainty.

To add to the woes of Cineworld and other cinema operators, streaming services’ popularity has skyrocketed even further during the lockdown. There is even more choice for the consumer now that Disney+ has joined the ranks of Netflix, Amazon Prime, Apple TV, and others. Some film companies have bypassed cinemas and released straight to streaming services. This could become the new norm even after cinemas reopen.

The medium to long-term outlook for leisure activities and leisure stocks has changed, in my opinion. Cineworld is just not a viable investment right now. It is saddled with debt, which it may struggle with now given changing market conditions. A valuation of just 4 times earnings does make it cheap, and somewhat enticing. That said, given the current uncertain state of leisure activities, I would avoid Cineworld for now but keep a close eye on developments. 

Stock #2

When most people think of ten pin bowling, the name Hollywood Bowl (LSE:BOWL) comes to mind. It is the UK’s largest ten pin bowling operator. Like Cineworld, Hollywood Bowl closed all its sites back in March when the government ordered a strict lockdown. Prior to this, a trading update for five months up to 29 February indicated like-for-like sales were up and revenue rose 13%.

Hollywood Bowl has lost nearly 50% of its share price value since the start of 2020. It currently trades at close to 140p per share. It decided to cancel an interim dividend it would have declared alongside interim half-year results. In addition, it extended its RCF by another £10m to help it through this turbulent time. In a shrewd move, it paid rent for all its sites for the March quarter up front. From an investment perspective, this at least shows a business displaying some readiness for a difficult time ahead.

Hollywood Bowl has taken steps to improve its liquidity and prepare for the worst. Despite that, it still faces similar issues to its leisure counterpart Cineworld. What its centres will look like and how they will operate is a mystery right now. Although there has been a slight easing of restrictions, leisure activities and such venues are not high on the government’s priority list. 

Cinemas and bowling centres will be faced with challenges. Firstly, I believe people may be reluctant to go to the cinema or bowling as freely as pre-Covid-19. Additionally, I feel these types of venues may struggle to cope with distancing rules and new guidelines. These types of investments for me are problematic.

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Jabran Khan has no position in any shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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