Down By 22 Percent: Should You Roll Out the Red Carpet for Cineplex Stock?

Heavily discounted stocks can fall somewhere on the spectrum of dangerous to highly attractive, and you should identify “where” before you make a purchase decision.

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With a price-to-earnings of just 4, Cineplex (TSX:CGX) may be considered an undervalued stock, but you have to take two other things into consideration as well. The first is that the undervaluation doesn’t match its discount. The stock has fallen 76% from its pre-pandemic peak, but the fact that the peak was artificially propped up because of a purchase offer for the company takes some sting out of this slump.

The second is the stock’s more recent performance. It has been in perpetual decline for almost two years, with no signs of a solid recovery on the horizon.

The 22% discount

The stock has fallen 22% from its 12-month peak, and its valuation has dropped by about 4% since the beginning of this year. That’s a far cry from its long-term drop, but it endorses the continuing pattern of decline.

While there are many factors behind this decline, there are two that stand out. The first is that Cineplex was supposed to be purchased by a UK-based entertainment giant.

The purchase offer was enough to push the price of the stock up 41% overnight, but the decline that followed when the offer was rescinded was far more powerful. Further worsening the situation was COVID, which brutalized the number of cinema-goers in the country.

The second factor is the future of cinema itself. The birth of streaming services was marked as the starting point of the decline of cinema, and it actually has impacted the number of screens and yearly visitors around the globe. But the business model may still have a few good years left and may evolve into something more promising.

Should you roll out the red carpet?

For now, the answer for most investors would be no. Dividends were one of the few good things going for Cineplex until the company cut them as well. But there is hope on the horizon as Cineplex’s management has stated that they would love to reinstate dividends in the future, as their earnings have picked up.

Reinstating the dividends might restore some of the confidence in this company, and it may even cause a surge in the stock price, as more investors buy it for the dividends, but the long-term picture would still be the same.

Foolish takeaway

It’s difficult to predict when the bear market phase of Cineplex stock will be over, but even if it is, there is a relatively low chance that the stock will go bullish for a long time or at an incredibly rapid pace. So, even if you are looking into some of the most heavily discounted stocks on the TSX, it might be a good idea to stay clear of Cineplex, at least for now.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Cineplex. The Motley Fool has a disclosure policy.

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