Warren Buffett is an investing legend who has dropped many pearls of wisdom over the years. The quote, “Be fearful when others are greedy. Be greedy when others are fearful” has always resonated with me because it epitomises the mindset of a contrarian investor. Covid has presented an opportunity to follow this excellent advice.
There are many shares in the UK market that I believe Warren Buffett would take an interest in, but the one I like the most is Cineworld Group (LSE: CINE).
Before I dive into the reasons why, I want to introduce a second quote from Buffett’s mentor Benjamin Graham, another titan of value investing. In his book The Intelligent Investor he wrote, “Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic”. I believe that Cineworld is an opportunity to follow the wisdom of Warren Buffett and Ben Graham.
Since the beginning of the year, Cineworld shares have fallen 76%. This is a definite example of fear causing the price to fall spectacularly. While it quickly recovered from the lows of in March, it has gained little ground since then. These price movements imply that investors are fearful for the future of Cineworld. I believe this has led to the kind of opportunity that Warren Buffett would capitalise on.
Cineworld also has a sizeable amount of short interest at 7.5% of all shares. These short positions are held by hedge funds, the alleged experts. On a basic level, professionals short stocks because they are fearful about the future of the company. While funds can profit from short positions, they are also often wrong – so shorted companies should not be avoided, in my opinion. This shows the kind of fear and professional opinion that Warren Buffett and his mentor Ben Graham were talking about.
Cineworld’s share price has fallen so far because the company lost all its revenue when this crisis began, but when its cinemas reopen at the end of this month, the hardest part should be over. The company’s recovery will not be swift, but it does not have to be for the brave investor to make money. I believe that consumers will return to cinemas after months of being stuck at home. Die-hard fans will certainly return to see the big screen as soon as they can. This kind of captive audience provides a form of defensive moat that would attract Warren Buffett, I believe.
It may take several years for traffic to return to pre-pandemic levels, but the industry should recover. While Cineworld stock has performed poorly in the past few years, I believe the current price offers a high return opportunity. The only downside left in Cineworld stock is the prospect of bankruptcy, which investors should consider. However, the announcement of further lines of credit should enable the company to survive, unless further widespread lockdowns occur.
Cineworld may have a long road ahead of it before it recovers, but I think its shares could be an investment that Warren Buffett and Ben Graham would proud of. However, as other Fools have noted, this investment is not for the faint-hearted.
Charles Heighton has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.