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Cineplex Inc.: Is it Safe to Buy the Dip?

If you’ve held on to your Cineplex Inc. (TSX:CGX) shares on the recent plunge, you’re probably contemplating throwing in the towel or buying more shares. Shares of CGX are now down ~30% from 52-week highs, but it appears that shares are rebounding, albeit very slightly. Is this just a dead cat’s bounce with more pain on the horizon? Or is this a rare opportunity to take Warren Buffett’s advice of being greedy while others are fearful?

I’ve been really bearish on Cineplex this year. In many previous articles, I’ve issued warnings to investors about the potential for a correction due to industry-wide headwinds and concerns of overvaluation. Unfortunately, it can be difficult to let go of a stock that we’ve grown attached to over the years, especially the ones that have delivered top-notch capital gains in addition to attractive dividends!

It’s hard not to get attached to your investments, especially considering the euphoria that you experience if shares are surging! Investing is an exciting thrill ride, because you own small pieces of real businesses, and if the businesses do well over the long term, you’ll reap the rewards.

Warren Buffett made the buy-and-hold-forever strategy popular, and while it’s usually a good idea to hang on to investments for the long term, it’s also important to be a skeptic as a shareholder. If something fundamentally changes your original investment thesis, then you’ve got to be honest with yourself and be willing to take some of your profits off the table.

That doesn’t mean you should be selling after every negative article you read! You need to be able to determine for yourself what’s meaningful insight and what’s just noise. If a recent event or trend rings alarm bells, then that probably means you should be doing more homework to protect yourself. Selling is tough, but that doesn’t mean you won’t buy more shares of your favourite company in the future. Once a stock crashes, you should be rejoicing as you load up on even more shares with the intention of riding the rebound over the course of many years.

In the case of Cineplex, the writing was on the wall. There were many headwinds, as I outlined in previous pieces, and if you’re an avid movie goer, you’ve probably noticed that there aren’t as many must-see hits as there were in previous years. This may be subjective observation, but when you consider the increasing popularity of streaming, alarm bells have to be going off in the ears of shareholders.

Are shares a buy after the crash?

Shares now have a bountiful 4.4% yield, close to the highest it’s ever been. In the past, CGX has typically offered a yield around 3.4%, so the extra 1% has got to be attractive to income investors. Although shares have taken a massive hit on the chin, CGX is still expensive based on a price-to-earnings basis. However, on a price-to-book, price-to-sales, or price-to-cash flow basis, shares appear to be a bargain.

Video streaming is nothing new. It’ll continue to be a long-term headwind, but I believe Cineplex has what it takes to adapt and reinvigorate long-term growth.

With shares below $40, I think there’s a great deal of value to be had for value investors seeking a solid dividend. If you’re bullish on Cineplex’s long-term revenue-diversification initiatives, then now may be the perfect time to be a buyer. The bottom may not be in yet, but I believe there’s a considerable margin of safety involved with purchasing shares at such a depressed level.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

 

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