The increase in investor interest in value stocks today has skyrocketed. This is partly due to what see as a value rebound on the horizon in 2021. Additionally, others view these investments as solid picks if value outperforms momentum in the years to come. We’ve simply seen such a valuation increase in growth stocks that it reasons a value bull market ought to be on the horizon.
That said, value traps seem to be everywhere these days. One such value trap I see as particularly insidious is Cineplex Inc. (TSX:CGX) right now.
Long-term secular headwinds won’t abate any time soon
The idea that cinemas will return to full capacity once a vaccine has been widely distributed is hogwash. This is a company operating a business that is in sector-wide decline. Prior to the pandemic, Cineplex stock was already tanking on concerns around declining attendance numbers. These low attendance numbers were due to a number of secular shifts that remain in place.
Moviegoers have shifted how they opt to view content. Indeed, streaming platforms such as Netflix, Inc. (NASDAQ:NFLX) have continued to eat away at market share over the past decade.
With more and more streaming options coming online, cinema operators are seeing their once-reliable clientele disappear. Additionally, more blockbusters are being delivered via on-demand and streaming platforms, further diminishing the long-term outlook for the traditional cinematic experience. Should Hollywood see greater value in online releases moving forward, the business models of Cineplex and its peers will see incredible downside pressure.
Such a scenario is more likely than not. I think the lower attendance trends we’ve seen prior to the pandemic are only likely to be accelerated due to this pandemic. Further, this pandemic could last a lot longer than many investors believe. Accordingly, my advice to value investors is to look elsewhere for stocks in sectors with secular tailwinds.
But wait — has this stock been a great rebound play thus far?
Sure, investors who bought the bottom with Cineplex stock have seen their contrarian play net a return of more than 110%.
That said, where this stock goes from here is much more important that how this stock has traded previously. I anticipate Cineplex stock could see tremendous downside pressure in a number of scenarios. If the company can’t meet its debt covenants, pain is on the horizon.
If the pandemic lasts through 2021, Hollywood will be forced to change its business model more permanently. Streaming platforms could eat further into Cineplex’s market share. Individuals may simply be less likely to see the value proposition of theaters in this new age of at-home entertainment.
I don’t see the argument for secular tailwinds in the face of these sector-wide challenges. Cineplex is a stock value investors should simply steer clear of right now. I’d recommend investors check out other great value options with earnings growth that pay a dividend. Cineplex doesn’t meet this criteria — and likely won’t for a while.
