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Should I buy Cineworld shares now?

An illuminated Cineworld sign
Image source: DCM

I believe Cineworld (LSE:CINE) has been one of the biggest losers on the stock market since it crashed when the pandemic began last year. After ‘freedom day’ last week, could Cineworld shares be a good option for my portfolio now? Let’s take a look.

Pandemic woes

Cineworld is the second-largest cinema chain in the world. It has over 9,000 screens spanning 10 countries and a workforce of over 30,000.

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The Covid-19 pandemic and ensuing market crash dealt Cineworld a crushing blow. Restrictions came into force affecting businesses like Cineworld in a way we haven’t seen in this lifetime and may never see again. To say performance and its share price were affected would be an understatement.

Cineworld shares are currently trading for 63p per share whereas five years ago today, they were trading for 260p. That equates to a 75% drop in share price. Prior to the market crash, shares were trading for 181p per share which is a 65% drop compared to today’s price as I write.

As well as Cineworld shares tumbling in value, its financials and balance sheet were badly damaged. Revenue levels between 2019 and 2020 dropped close to 80% and it had to borrow extensively to keep the lights on. When looking at companies to invest in for my portfolio, these types of things are major red flags for me.

Can Cineworld shares bounce back?

Despite the red flags I mentioned, I am always on the lookout for contrarian options and recovery plays. When I examine such options, I understand these will be long-term buys and I will need to remain patient.

So, do Cineworld shares entice me with the long term in mind? There are a few factors that definitely do.

Firstly, pent up demand will play a part. As a film lover and avid cinema-goer I had been starved of the silver screen experience and can imagine many millions of consumers feeling the same. With the film studios beginning to release blockbusters once more, and cinemas reopening, people could flock to the cinema to get their fill.

Next, this demand and freedom day have improved Cineworld performance prospects massively. Since cinemas reopened in May, there has been optimism and confidence emanating from the Cineworld leadership team.

Finally, I believe Cineworld shares are actually cheap just now. It is worth noting that its share price was already on a downward trajectory prior to the crash, mainly due to an expensive merger. Based on current levels, I think shares are trading for lower than their true value. I expect the Cineworld share price to increase in the coming months ahead.

My verdict on Cineworld shares

I am aware of the pitfalls in investing in Cineworld. Its massive debt levels concern me and make me wonder how long it will take to pay that off and return to some form of previous glory. In addition to this debt, the ongoing pandemic does unsettle me. There is still the threat of new Covid-19 variants that could enforce further restrictions and affect Cineworld in its recovery. 

Overall, I will not buy Cineworld shares for my portfolio at this time. I can understand why other investors would consider it a contrarian option or recovery play, but I will avoid it for now.

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Jabran Khan 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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