Warren Buffett would never touch cannabis stocks with a barge pole. He shuns speculative investments and couldn’t care less if he missed out on tripling his money over the course of a few weeks. The Sage of Omaha is all about finding discrepancies between a stock’s market value (current stock price) and its intrinsic value (the true value of a company’s future discounted cash flows), not seeking the highest possible return in the shortest time span possible. When it comes to stocks that trade at vast discounts to their intrinsic value, I think Cineplex (TSX:CGX) is in a class of its…
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Warren Buffett would never touch cannabis stocks with a barge pole. He shuns speculative investments and couldn’t care less if he missed out on tripling his money over the course of a few weeks.
The Sage of Omaha is all about finding discrepancies between a stock’s market value (current stock price) and its intrinsic value (the true value of a company’s future discounted cash flows), not seeking the highest possible return in the shortest time span possible.
When it comes to stocks that trade at vast discounts to their intrinsic value, I think Cineplex (TSX:CGX) is in a class of its own, even though it may not seem like it given the cut-throat environment it’s currently operating in.
The movie theatre and entertainment company fell from glory last summer, as it became caught on the wrong side of one of the most profound secular trends in our time: the rise of stay-at-home subscription video on demand (SVOD) services (or video streamers). With more higher-quality video streaming options becoming available, Canadians have more of a reason to stay at home rather than go out to see a movie that’s probably not worth watching on the big screen.
Apple recently announced its intention to release original content at no cost for its device users. The iPhone maker is slated to spend US$1 billion on content that’ll be streamable via Apple TV or any other Apple device through the TV App at no cost in the initial stages.
The decision to make streamable content free came as a shock to many, as Apple hasn’t ever been known to offer anything for less than a substantial premium over any alternatives on the market. Apple’s “freebies” definitely look like some sort of “dividend for customers” and a crafty long-term move to attract consumers from other video-streaming services and the last of the theatrical movie goers.
In other words, Cineplex is going to have an even harder time getting butts in its seats, as video streamers begin to undercut one another.
So, with a box office rebound out of sight, how is Cineplex stock ever going to see its all-time highs?
While Cineplex’s fate is tied to the box office today, the company is well on its way to becoming a diversified amusements and entertainment company with due time. The company is on the verge of monetizing its eSports platform; Rec Room is picking up major traction; Topgolf is finding a spot with millennials; and the nationwide Playdium roll-out is a catalyst that could spark the beginning of a multi-year rally past all-time highs over the next three years.
Who knows? Playdium could become the Canadian answer to Dave & Buster’s Entertainment, and if that’s the case, Cineplex could skyrocket a few years down the road.
Yes, Cineplex is a primarily a movie theatre company today, but it’ll be so much more in a few years. If you’ve got an investment horizon of at least five years, you should have a close look at Cineplex shares while they’re at multi-year lows because I believe the public is too focused on what the company’s going to do in the short term to offset the box office pressures, rather than considering the promising long-term growth concepts that’ll make the company great again.
I’m a raging bull of the Cineplex’s new growth trajectory and have no doubt that the company will return to explosive growth mode as it gradually transforms from a movie theatre operator into a full-service entertainment provider.
Cineplex will probably face further pressure over the near term, but in the grander scheme of things, any further declines will be nothing more than terrific long-term buying opportunities. The 5% yield should be enough of an incentive for most investors to wait it out as the box office pains gradually begin to be less painful with time.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette owns shares of Apple. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple.