The Cineworld (LSE: CINE) share price rallied strongly between October 2020 and March this year. If I’d had the guts to invest (kudos to those who did), I’d have been sitting on a gain of around 400%. That’s an incredible return over such a short period of time. Since March however, this momentum has reversed. What’s going on?
Why is the Cineworld share price falling?
One potential explanation for the decline might be a simple bout of profit-taking. Having done so well over recent months, it’s only natural some traders will want to sell up and move on.
Whether this decision is the right one is debatable. On Monday, the FTSE 250 firm revealed it had seen a “strong opening weekend” and that it expected audience numbers to continue rising in the months ahead. With delayed blockbusters such as Top Gun: Maverick, No Time to Die and Black Widow finally due for release, it’s possible that recent weakness in the Cineworld share price will prove temporary.
That said, I’m still wary. The arrival of warmer weather in the UK risks spoiling the party. On top of this, investors can’t overlook the astonishing amount of debt still weighing on the balance sheet.
There are also developments within the film industry that need to be considered. The chance of movies being made available to stream at the same time they’re released in cinemas could be another headwind for Cineworld, especially once all the additional costs of making at trip are factored in.
Taking the above into account, it’s perhaps to be expected the company remains a favourite with short-sellers (those betting that a particular share price will fall). As I type, Cineworld is the second most hated stock on the market. The only stock attracting more short-sellers, according to shorttracker.co.uk, is supermarket giant Sainsbury.
Are there safer ‘reopening’ opportunities in the market? I think so.
A better opportunity?
Today’s update from low-cost gym provider The Gym Group (LSE: GYM) has been warmly received by the market. It’s not hard to see why.
With all of the company’s 187 sites now open, trading has “outperformed” management’s own expectations. Total memberships climbed from 547,000 at the end of February to 729,000 by 24 May. This brings the company close to the 794,000 memberships seen in December 2019. Fitness fans are also visiting sites at record levels (an average of 1.5 times per week).
Although trading may slow during the summer, GYM is in no mood to rest. Having opened four new gyms since 12 April, the firm looks set to take advantage of (newly) vacated sites and continue growing its estate. With net debt of “only” £63m at the end of April, GYM is clearly in better financial health to achieve its goals than Cineworld.
Of course, any investment involves risk and GYM’s no exception. In my view, there’s a distinct lack of economic moat here. As a result, the company will likely always face fierce competition for members.
There’s also no guarantee the popularity of working out from home, from both a convenience and cost perspective, won’t continue rising. And, as much as I hate to say it, there’s also a chance that coronavirus infection rates could spike again.
Despite these potential drawbacks, I suspect I’d feel far more comfortable buying GYM over CINE right now.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended The Gym Group. 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.