FTSE 250 stock Cineworld (LSE:CINE) has been high on the list of most heavily shorted stocks for the past two years. When a stock is ‘shorted’ it means hedge funds and other institutional players see weakness in the stock and are betting its share price will sink. Therefore, when a company is heavily shorted, it pays for investors to be wary.
Cineworld’s volatile share price
Cineworld became a significant short seller target long before the pandemic hit. That’s because with admission rates falling, hedge funds were witnessing a drop in revenues and profit. And therefore, this raised the likelihood of a share price crash.
The Cineworld share price has fluctuated heavily in recent years for this reason. When short interest increases, so does speculation. So, rather than a safe long-term investment, it becomes a stock with which day traders love to gamble.
After enjoying an upward trajectory from 2012 to 2017, the Cineworld share price began its extremely volatile period. Two years ago, it was trading above £3 a share, but it had collapsed below 20p by the March 2020 market crash. The volatility continued throughout 2020 and today it sits around 96p.
An industry facing significant headwinds
The cinema industry faces many headwinds. The rise of the streaming networks, from Disney+ to Netflix and Amazon Prime, has led to cinema quality TV on demand at home. This gives consumers a wide viewing choice in the safe comfort and convenience of home, and it’s cheaper than going to the cinema.
Meanwhile, the pandemic has taken nearly a year of revenues away from Cineworld. In 2019 it enjoyed revenues of $4.37bn which fell to £852m in 2020. When footfall resumes, it’s likely to be at a reduced capacity. Overheads will stay the same, but revenues are not likely to return to pre-pandemic levels for a very long time.
Add to this the massive debt Cineworld has had to raise. It’s escalating above £6bn and that money has to be paid back, which further reduces the profit-making potential for the group.
An uncertain future
Overall, I’m impressed at how the company has navigated the choppy waters of the pandemic. It’s clearly doing all it can to stay solvent, and it may well succeed. But at this point I think a lot will depend on luck and the psychology of the public. Will we want to rush back to cinemas, or will other entertainment options be more appealing?
Also, Covid-19 is still with us and rampaging through some parts of the world. Of course the rise of lateral flow Covid-19 testing may offer a way to allow more people to attend the cinema, or perhaps Cineworld will come up with another novel way to generate revenue. For instance, during the pandemic in South Korea, a cinema chain generated income by hiring its screens to gamers.
Unfortunately, when it comes to the future of Cineworld, I still feel I’m in the dark. Therefore, I don’t feel confident buying Cineworld stock today.
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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. Kirsteen owns shares of Amazon. 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.