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The Cineworld share price is down 85% this year! Here’s why it’s my contrarian pick

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FTSE 250 cinema stock Cineworld (LSE: CINE) has had an awful 2020. The Cineworld share price is down by around 85% since last November. Entertainment venues have been hit by the double whammy of lockdowns and conservative consumer spending in these uncertain times. Yet, I don’t think it’s a stock to write off.

For one, it looks ridiculously cheap now at sub-30p levels. The way I see it, there’s little to lose in buying this FTSE 250 stock at its current share price. Sure, it might stay at these rock-bottom levels for a while, but I think it will start inching back up. Here’s why.

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Better times ahead

I reckon that we’ll get some grip on coronavirus soon enough. City-wide Covid-19 testing has started in Liverpool, which returns results in 20 minutes. There’s even hope that AstraZeneca’s vaccine, currently in trial phase, can become available before the end of 2020. Even if that doesn’t happen, at the very least we can expect a vaccine sooner rather than later. Since Cineworld’s fortunes are directly linked to the lockdown, I’d expect its share price to start rising as the situation gets better.

Next, the broader economic picture is slated to improve significantly in 2021. With an improving likelihood of resolving the Covid-19 crisis, I reckon that forecasts will stay optimistic. Cineworld is a classic cyclical stock, which means that it does better when the economy’s growing and vice-versa. As things get back on track, CINE can revive as well. I like that more than half its revenues are generated in the US, which is not just the largest global consumer market, but it’s also expected to show 3.1% growth next year. 

CINE’s rising debt

However, the big danger to the Cineworld share price is liquidity. According to Fitch Ratings, it could run out of money before the end of the year. Based on this, it has also lowered the FTSE 250 cinema chain’s debt rating. It’s possible, of course, that the company may be able to manage securing more funding to keep going. 

There’s also the possibility of it becoming an acquisition target. In fact, speculation is already doing the rounds since a Chinese entrepreneur upped his stake in the business recently. But even if that were to happen, it’s unlikely that Cineworld will be valued as low as its current share price, especially given its past elevated levels.

In sum

I’m not saying that the Cineworld share price will bounce back to previous highs any time soon. In fact, that’s quite unlikely for now. It’s quite possible that it will start gaining ground, however, in the next few months. This can be as much in anticipation of improvement as on-the-ground increase in cinema activity. 

As an investor, I’m interested in how much my investments can grow. And the Cineworld share price seems to be poised for becoming a growth stock again. Risky, but growing.

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Manika Premsingh owns shares of AstraZeneca. 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.

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