This week saw Bloomberg reporting on the boom in movie exhibition across the Pacific. This could be a sign of things to come in North America. If so, Cineplex (TSX:CGX) stock could be a ticking time bomb of upside.
According to the report: “In Japan, a record number of people saw movies in Imax Corp. theaters over the weekend, according to Chief Executive Officer Rich Gelfond. In China, December ticket sales at the company’s big-screen theaters jumped 28% from a year earlier, when few people had heard of the novel coronavirus.”
At the time of writing, Cineplex is sitting on losses of around 73%. That’s a catastrophic hemorrhaging of value. But for current shareholders who bought in before 2020, those losses are only realized upon sale of shares. In other words, if Cineplex stakeholders wait it out, at least some of those losses could be recouped.
Buy, hold, or sell? Check exposure first
On the flipside, Cineplex shareholders who got in at the bottom during the summer have enjoyed a three-month gain of 94%. However, down 5% in four weeks, a pullback could be in the making if investors sense an extension to the pandemic. Those recent shareholders may even want to consider selling and buying back in again at a lower level.
For newcomers, though, Cineplex offers a chance to buy a severely beaten-down name. If the market deteriorates, prospective Cineplex shareholders may want to think about buying in stages rather than backing up the truck. Because the fact is that if the market recovers appreciably, Cineplex could see huge upside.
The consensus right now is that Cineplex is a moderate sell. But the contrarian perspective is naturally a moderate buy. This depends, of course, on whether an investor is already exposed to the movie exhibition space. For current shareholders, individuals should look at when they bought in, and decide whether to trim on three-month strength or hold on 12-month weakness.
A key stock for a recovery
This is a stock that sells for $9.30 on a good day. The average consensus is that Cineplex is priced exactly where it should be. Pessimistic analysts see 13% downside. But high price targets project an enormous step-up, with the potential to hit $34 a share. That’s 3.6 times the current price. In other words, given optimal circumstances, Cineplex could be a multibagger of epic proportions.
Of course, a lot of stars will have to align for that to happen. There are more moving parts to a recovery in the movie exhibition space than you can shake a clapperboard at. There’s the uneven vaccine rollout. There’s the disruption of the digital content-streaming space. And there’s also the downturn in production, meaning that supply — not just demand — is an issue here.
And yet there are studio lights at the end of the tunnel. From Asia ticket sales to a tentatively reinvigorated Hollywood, hope remains. A locked-down public could return en masse to theatres later in the year, igniting Cineplex shares. In essence, Cineplex is the ultimate indicator stock for a reopened economy.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.