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My last call on Cineworld shares was spot on. Here’s my view on the stock now

Edward Sheldon, CFA
·3-min read
Economic Uncertainty Ahead Sign With Stormy Background
Economic Uncertainty Ahead Sign With Stormy Background

When I last covered Cineworld (LSE: CINE) shares on 18 August, I said they were “quite risky.” I wrote that the reopening of cinemas “may not be straightforward.” I also warned investors that hedge funds were betting heavily against the stock.

In hindsight, my assessment of CINE was spot on. On 18 August, Cineworld’s share price closed at 47.43p. This morning, it crashed to an all-time low of 17p. That means it’s fallen more than 60% since my last article. Hopefully, I saved a few UK investors from losing money.

So, why has Cineworld’s share price crashed again? And what’s my view on the stock now?

Cineworld share price crash

The reason Cineworld shares have tanked today is the that company announced it’s temporarily closing its 127 cinemas in the UK and 536 cinemas in the US.

It has made this decision due to the fact that studios are reluctant to release their new films in the current environment. The release of the new James Bond movie, No Time To Die, for example, was recently delayed (again) until April 2021.

Cineworld says that without new releases, it can’t provide its customers with the strong commercial films needed for them to consider coming back to cinemas against the backdrop of Covid-19.

The group says it’ll continue to monitor the situation closely and will communicate any future plans to resume operations at the appropriate time.

High level of uncertainty

Make no mistake, this is bad news for Cineworld, especially when you consider the large pile of debt on the company’s balance sheet. With no money coming through the doors in the UK or the US, the outlook’s highly uncertain.

In its half-year results, issued on 24 September, Cineworld said that at 30 June, it had US term loans outstanding totaling $3.4bn. It also had a euro term loan of $215.9m and a $573.3m revolving credit facility (RCF), of which $462m had been drawn upon.

As a result of this large debt position, the group may have to raise money from shareholders in the near future.

It’s worth noting that in its H1 results, the group advised it was assessing several options with regard to additional sources of liquidity. These included the extension of the RCF facility, which matures on 31 December, an additional term loan, and a potential equity, or semi equity, raise.

The hedge funds saw this coming

Whatever the outcome, it’s fair to say hedge funds saw this coming. When I last covered CINE, a number of funds were shorting it. With Cineworld’s share price tanking today, they’ll have cleaned up.

It’s a great example of why you should always be very careful when a stock is heavily shorted. More often than not, the hedgies get it right.

Cineworld shares: what now?

My view on Cineworld now? It’s a stock to avoid. The uncertainty here is sky-high. I’ll point out that short interest remains high. As of 2 October, CINE was the most shorted stock in the UK, with 8.5% short interest and eight funds shorting. In my view, that’s a good reason to give the stock a wide berth.

If you’re looking for investment opportunities, I’d look elsewhere.

The post My last call on Cineworld shares was spot on. Here’s my view on the stock now appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares mentioned. 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.

Motley Fool UK 2020