Is Cineplex (TSX:CGX) stock ready for a breakout? Or is the party over with respect to this rebound play?
This is the key question many investors are asking right now. On one hand, there’s nothing like picking up a great company at a dirt cheap price. The feeling of getting a few really good puffs out of a “cigarette butt” stock (Warren Buffett’s terminology) is incredible. Such value opportunities rarely exist, but when they do, value investors can get pretty excited and try to buy the bottom.
I think this has certainly been the case with Cineplex of late. Investors are looking for any sort of deep value in these otherwise overvalued markets. Cineplex has historically been a great dividend paying long-term hold for those with income mandates. Since eliminating its dividend and having its long-term outlook maimed by the pandemic, investors have fled this stock en masse.
I think this is a stock that could represent a value trap right now. Accordingly, I think those trying to pull a Warren Buffett and buy the rebound in Cineplex could get hurt badly.
There’s cheap — and then there’s value
There’s a big difference between a stock that’s cheap, and one with tremendous amounts of unrealized value. Indeed, the market does get pricing wrong, and there are mispricing opportunities to take advantage of. That said, if one believes in the efficient market hypothesis, most of the time, stocks are correctly priced.
Cineplex’s absolutely decimated stock price (relative to a few years ago) reflects the inherent risks with this company. The attendance declines we saw prior to the pandemic have been accelerated by social distancing measures put in place. Accordingly, the fact that the pandemic is raging on worse than ever, and more restrictions may be on the horizon, doesn’t bode well for Cineplex stock in the near-term.
Over the long term, Cineplex will have a myriad of headwinds to deal with. The company has put off its debt for now, but will need to either renegotiate terms in the future or begin paying down its debt load. Additionally, I don’t see a full-fledged recovery in attendance to ever materialize. I think the structural decline the movie theatre business is in is not temporary. Indeed, there’s a significant reason to be pessimistic about the long-term health of this company right now.
Right now, Cineplex looks a lot closer to a value trap than a cigarette butt one should think about picking up. I don’t think the sector-wide decline of Cineplex’s core business is likely to end once the pandemic is over.
Investors have a range of other better value picks out there right now.
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned.