The Time Has Finally Come to Buy Cineplex (TSX:CGX) Stock

Cineplex Inc. (TSX:CGX) may have finally become a buy at around $5, but could there be further to fall before the COVID-19 vaccine arrives?

| More on:
Businessmen teamwork brainstorming meeting.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Cineplex (TSX:CGX) stock has been in a world of pain for years now. The perpetually falling knife has nicked most investors who’ve attempted to catch it over the years, whether we’re talking about general turnaround hopes, Cineworld takeover speculation, or what’s looking to be a short-lived reopening of movie theatres.

In the era of the insidious coronavirus, which puts movie theatres at ground zero of the crisis, it’s hard to find meaningful catalysts that can propel Canada’s beloved movie chain out of its funk. I’ve been incredibly bearish in many prior pieces over the years after having called the initial crash in the name back in the summer of 2017 when the stock was a Canadian dividend darling hovering around its all-time highs.

Cineplex: A horror movie of a stock

My, how the times have changed. Cineplex’s shares have lost over 90% of their value, hurting contrarians who were reluctant to throw in the towel on the wealth destroyer that can’t seem to catch a break. With a second wave of COVID-19 cases surging in various localities, Cineplex is at risk of shuttering its locations for at least another two quarters.

My original bear thesis on the name was that video streamers popping up from left, right, and centre would swoop in a steal Cineplex’s lunch. That bear thesis holds to this day, as rumours continue swirling that they’re looking to acquire the rights to big-budget box office hits that would have provided great financial relief to the ailing movie theatre companies. To add salt in Cineplex’s wounds, the pandemic has pretty much resulted in a worst-case scenario.

Nobody wants to run the risk of contracting COVID-19 in a movie theatre, even though I’m sure there are proper safety precautions in place. Moreover, with a tonne of laid-off Canadians, it’s hard to justify paying a premium price tag to go out and see a movie like Tenet if you’re unable to truly relax with the worry that someone in the theatre could cough without a mask on their face.

Going to the theatres in a pandemic can be a rattling experience, even if the number of empty seats vastly outnumbers the filled ones. With a worsening second wave that could last months, I think there’s no chance that Cineplex will be able to go cash flow positive by the second half of next year, especially if government-mandated lockdowns are put into place.

What’s causing me to change my tune on Cineplex?

Valuation. The stock has fallen too hard, too fast. Everything that could have gone wrong went wrong for Cineplex. Immense business erosion can be expected to weigh for years after this pandemic concludes. But with a somewhat decent liquidity position, I think Cineplex can survive this crisis. The balance sheet is on unstable footing, but I just don’t see a scenario where we rise out of this pandemic without a beloved Canadian entertainment company like Cineplex.

In due time, people will return to theatres. And Cineplex will be right back to diversifying its business with investments to beef up its lucrative amusements segment. While hope may be two or even three years away, I still think investors should not be overly pessimistic with the entirety of their portfolios.

Few things are more unpredictable than biology. A vaccine breakthrough could happen at any time. And if things aren’t as gloomy as most expect, Cineplex stock is one of the names that could easily triple over the course of just a few trading sessions. That said, the name is also at risk of going insolvent in a worst-case scenario.

Foolish takeaway

The name remains a highly speculative bet, but one that I believe is worth taking if you’re a young investor with disposable income. If you are going to take a chance on Cineplex, make sure you do so outside of your TFSA, because if the company folds and the stock implodes to zero, you’re going to want to use those losses to offset gains elsewhere in your portfolio.

At one times book value, I think betting on Cineplex at a time of maximum pessimism isn’t all a bad idea, even if the trend suggests that you’re likely to lose money over the short term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Stocks for Beginners

Choice of fashion clothes of different colors on wooden hangers
Stocks for Beginners

Is Aritzia (TSX:ATZ) the Best TSX Stock to Buy in July 2022?

Aritzia’s international market expansion and improving profitability could help its stock recover fast.

Read more »

Stocks for Beginners

Opportune Time for Investing in Canada: 3 Value Stocks to Buy Now

A good time to invest in stocks is when the market is in a downturn. Now is an opportune time…

Read more »

A stock price graph showing declines
Stocks for Beginners

Why Bombardier Stock Crashed Over 35% in June

Bombardier’s stock price has been consistently falling for the last five months.

Read more »

Plane on runway, aircraft
Stocks for Beginners

Why Air Canada Stock Plunged 28% in June

Here's why Air Canada stock tanked by nearly 28% in June, extending its second-quarter losses to 34%.

Read more »

Man holding magnifying glass over a document
Stocks for Beginners

The Valuation Conundrum: P/E Ratio vs. P/S Ratio

Did you buy a stock with low P/S ratio and make a loss? Most investors fall prey to the valuation…

Read more »

grow money, wealth build
Stocks for Beginners

5 Top Canadian Growth Stocks to Buy in July 2022

The second half of 2022 brings hope of recovery and fear of a recession. These mixed emotions have put growth…

Read more »

Stocks for Beginners

New Investors: 3 Top Dividend Stocks to Start a Simple Portfolio

These quality dividend stocks are worthy for new investors to consider for a simple passive-income portfolio.

Read more »

Make a choice, path to success, sign
Stocks for Beginners

New to Investing? Here’s How to Not Lose Money

One way to avoid losing money in the stock market is to stick to broad market index funds like iShares…

Read more »