Cineworld (LSE: CINE) shares were up 15% yesterday, making it among the biggest FTSE gainers. This shows the extent of recovery possible for the stock in a really short period of time. And I reckon there is more to come.
The FTSE 250 cinema chain has been highly sensitive to investor sentiment in the past year. It did not help that last week the markets had a mini meltdown as coronavirus infections grew once again. Even with the latest increase, its share price has fallen by almost 30% from early July, at least partly because of this.
But I do believe that the worst may just be over for Cineworld shares. Here is why.
#1. Improved market sentiment
Market sentiment is back up, indicating that the meltdown was a brief scare rather than a real sign of a market crash. The FTSE 100 index is back around 7,000 today. This should bode well for all stocks. But it is especially good for relatively volatile stocks like Cineworld, as is evident in its strong performance on Wednesday.
Moreover, as populations around the world are being vaccinated, we are better protected against the pandemic. This is particularly encouraging for Cineworld, whose dominant markets are the US and the UK. In both of them, at least 50% of the people have had the jab.
#2. Improved prospects
Besides this, early indications of performance post reopening have been encouraging. In May, when cinemas reopened in the UK, Peter Rabbit 2, proved to be popular among audiences. Cineworld said that it had surpassed expectations.
More recently, company CEO, Mooky Greidinger, has expressed satisfaction with the opening performance of superhero movie Black Widow. The Disney movie was simultaneously streamed on the producer’s own streaming channel. It is possible that cinema revenues would have been even higher if that were not the case.
Further, he believes that by 2022, which is just five months away now, box office numbers could return to their 2019 levels. This will put Cineworld in a good place to rebuild its financial health, which of course has been decimated during the pandemic.
#3. Cineworld shares are priced too low
I do believe that it will be a while before it can go back to its pre-pandemic health, however. And there can be challenges even when it does. Cineworld shares were trending downwards even through much of 2019. This followed its expensive acquisition of Regal Cinemas in the US that increased its debt, and a weak financial update.
These can show up again. But I still like Cineworld shares because keeping even this in mind, I think the stock has fallen way too much. Even after the latest increase, the share is still trading 44% lower than its highs in March this year. At the same time, its prospects have actually improved. It is also lower than its pre-pandemic levels by 63%, which has convinced me to buy the stock.
Manika Premsingh owns shares of Cineworld Group. 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.