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Cineworld shares are soaring in 2021. Should I buy?

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Nadia Yaqub
·4-min read
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Cineworld cinema
Cineworld cinema

Cineworld (LSE: CINE) shares are having a good run. Since the beginning of the year, the stock has increased over 85% and are up 435% during the past 12 months. But past performance is not an indication of future results.

There are a few reasons why I think Cineworld shares have recently rallied. I’ll cover them shortly. I’ve been tempted to dip my toe in but I’m not convinced by the investment case. For now, I’ll continue to monitor the share price as I reckon there are other better growth opportunities.

What’s behind the rise?

Cineworld’s business was impacted by the pandemic and as a consequence the shares became very cheap. I’m not surprised, especially when most of the company’s cinemas are temporarily shut down and revenue has dried up. Even now, Cineworld shares are a bargain with a price-to-earnings ratio of 8 times.

But the fact that there are several vaccines available has improved sentiment towards the stock. The vaccine rollout is going well, which has provided Cineworld shares with some momentum. The stock has been soaring on the back of a Covid-19 recovery and there are hopes that Cineworld will be able to open its venues again.

Over 70% of the FTSE 250 company’s revenue is derived from the US. So I reckon it also helps the share price when the US has announced a stellar stimulus package. This means that consumers will have more spending power. Hence it’s likely more Americans will go out and watch a movie, thereby boosting Cineworld’s revenue.

Turning bullish

According to shorttracker.co.uk, Cineworld shares have a short interest of 5.6%. This give me an indication of how negative investors are on the company. They are ‘shorting’ the stock. In other words, they are expecting Cineworld’s share price to fall.

When I last covered the stock in December, the short interest was almost 9%. So the fact that this number has come down tells me that investors seem to be turning bullish on Cineworld shares.

Heavily in debt

While I expect Cineworld shares to rise in the short-term on the back of a coronavirus recovery, I’m concerned over its debt pile. This has been growing and I’m worried whether Cineworld can afford to pay it off in the long run.

In November, the cinema operator secured $750m in additional liquidity to support the business. It also announced that its banks had agreed to waive all of its covenants until June 2022. I’m pleased that Cineworld has some breathing space in the short term. But I reckon the debt burden could weigh down on Cineworld shares in the long term.

Changing consumer habits

My other concern is the changing habits of the consumer. Streaming services such as Netflix, Disney+, and Amazon Prime are becoming popular and pose a threat to Cineworld.

The pandemic may have even caused a long-term behaviour shift. There are concerns over studios releasing their films directly onto the streaming platforms. I even think watching movies will now have to contend with playing video games, which have also proven popular during the pandemic.

As a long-term investor, I don’t think the investment case for Cineworld shares sound too compelling. For now, I’ll just be monitoring the stock.

The post Cineworld shares are soaring in 2021. Should I buy? appeared first on The Motley Fool UK.

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Nadia Yaqub has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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.

Motley Fool UK 2021