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Think contrarian! Why I like this much-maligned FTSE 250 stock

Michael Baxter
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It is very hard to find anyone who likes this FTSE 250 company. There is a good reason, too. Its debt is at a worrying level.

Others say its product is just waiting to be disrupted by changing consumer trends charged by technology. Here, I disagree. The product is the reason why I like this company. As for net debt, this has so vexed shareholders that I think its shares have a whiff of a bargain about them.

I refer to Cineworld (LSE: CINE). The downside has been well explained elsewhere. I think that analysts and other critics of the stock are making the mistake of not seeing the company from the point of view of the consumer.

It recently emerged that Cineworld was the most shorted stock. Bear in mind that finance costs make up a high proportion of operating profit and you can see why.

Then there is Netflix, Amazon Prime, Disney, heck even Apple is investing big money into a streaming channel – so why would anyone want to go to the cinema, right?

This negative narrative is wrong, and part of the clue as to why this is so, sits in that list above: the word ‘Disney’.

TV streaming and the cinema are often complementary. Disney illustrates this point perfectly: big blockbuster movie releases put the sugar on the popcorn that is its business. Disney uses the extraordinarily high profile that the cinema has earned for some of its franchises to create a series of other products, such as content for its premium subscription service and theme parks. Cinema is fundamental to this and it is fundamental because the psychology of going to the movies is different from the psychology of watching a boxset on your TV or smartphone.

Cineworld’s revenue has been hit by timing in movie releases. Actually, despite Avengers Endgame being the biggest box office hit ever, 2019 has been a disappointing year so far. 2020 and 2021 promise to be bigger — with releases lined up including the next James Bond movie, a new Batman flick, and most promising of all, Avatar 2 — with the original Avatar, the second biggest box office hit to date (but bigger than the recent Avengers movie after factoring in inflation).

Cineworld is interesting, not only because of its impressive number of screens in the UK, US and Eastern Europe, but because it is constantly experimenting with technology to create more thrilling viewing experiences and because products such as its Unlimited Card are proving popular.

Sure, a trip to the cinema has become expensive, but compare the cost to a night at the pub. Cinema’s success depends almost entirely on the allure of the movies it shows. I don’t think this is fully reflected in the share price, nor is the potential lift it could gain from the movies scheduled for release next year and the year after. Given this and the fact that the share price has fallen by around a third since April, I think Cineworld could be a buying opportunity, especially If you like the odd contrarian investment.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK owns shares of Apple. 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 2019