Short sellers love Cineworld stock! Will it ever be a lucrative investment?

The Cineworld share price has been on a rollercoaster ride for over two years. Can this FTSE 250 stock stabilise and unlock shareholder wealth?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 250 stock Cineworld (LSE:CINE) has been high on the list of most heavily shorted stocks for the past two years. When a stock is ‘shorted’ it means hedge funds and other institutional players see weakness in the stock and are betting its share price will sink. Therefore, when a company is heavily shorted, it pays for investors to be wary.

Cineworld’s volatile share price

Cineworld became a significant short seller target long before the pandemic hit. That’s because with admission rates falling, hedge funds were witnessing a drop in revenues and profit. And therefore, this raised the likelihood of a share price crash.

The Cineworld share price has fluctuated heavily in recent years for this reason. When short interest increases, so does speculation. So, rather than a safe long-term investment, it becomes a stock with which day traders love to gamble.

After enjoying an upward trajectory from 2012 to 2017, the Cineworld share price began its extremely volatile period. Two years ago, it was trading above £3 a share, but it had collapsed below 20p by the March 2020 market crash. The volatility continued throughout 2020 and today it sits around 96p.

An industry facing significant headwinds

The cinema industry faces many headwinds. The rise of the streaming networks, from Disney+ to Netflix and Amazon Prime, has led to cinema quality TV on demand at home. This gives consumers a wide viewing choice in the safe comfort and convenience of home, and it’s cheaper than going to the cinema.

Meanwhile, the pandemic has taken nearly a year of revenues away from Cineworld. In 2019 it enjoyed revenues of $4.37bn which fell to £852m in 2020. When footfall resumes, it’s likely to be at a reduced capacity. Overheads will stay the same, but revenues are not likely to return to pre-pandemic levels for a very long time.

Add to this the massive debt Cineworld has had to raise. It’s escalating above £6bn and that money has to be paid back, which further reduces the profit-making potential for the group.

An uncertain future

Overall, I’m impressed at how the company has navigated the choppy waters of the pandemic. It’s clearly doing all it can to stay solvent, and it may well succeed. But at this point I think a lot will depend on luck and the psychology of the public. Will we want to rush back to cinemas, or will other entertainment options be more appealing?

Also, Covid-19 is still with us and rampaging through some parts of the world. Of course the rise of lateral flow Covid-19 testing may offer a way to allow more people to attend the cinema, or perhaps Cineworld will come up with another novel way to generate revenue. For instance, during the pandemic in South Korea, a cinema chain generated income by hiring its screens to gamers.

Unfortunately, when it comes to the future of Cineworld, I still feel I’m in the dark. Therefore, I don’t feel confident buying Cineworld stock today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Kirsteen owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon, Netflix, and Walt Disney and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »