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Sometimes when I hear about a penny stock, I just go blank. His name is not familiar to me and I have no idea about the business in question.
That is not the case when it comes to Cinemundo (LSE: CINEMA), yes. The string is known. His name is in the lights of towns and cities across the country. In fact, the company also operates thousands of theaters around the world, including in its key market of the US.
Despite that, Cineworld is a penny stock.
The shares are selling for about 5 pence each. That’s nearly a 99% drop from its 2019 highs, before pandemic restrictions hit business hard. If I were to invest £1,000 today and then Cineworld can go back to its previous price, my investment would be worth over £60,000! If that were to happen, Cineworld could become the deal of the year (or even the decade) for my portfolio.
But how likely is it?
who owns what
I think it is highly unlikely.
Cineworld has the makings of a good business even now. He has wide brand recognition, a wealth of wealth and a lot of experience when it comes to managing theaters.
But you also have debt. Lots of debt. In fact, the company’s net debt in its interim results was $8.8 billion.
Why does that matter when it comes to Cineworld shareholders?
If I buy the penny stock today, I effectively get a very small claim on the assets of the company, along with all the other shareholders. But shareholders rank lower than creditors when it comes to a final claim on a company’s assets.
With a net debt of $8.8 billion, clearly many creditors will want their money back from Cineworld now or in the future. If that drives the company into bankruptcy, there may very well be nothing left for shareholders (some parts of the company are already in a form of bankruptcy protection known by its US name Chapter 11, although they could grow out of that in the future).
However, even if the company avoids bankruptcy, the massive debt load would likely eat into any profits it makes for years or decades to come.
considerable risks
Either way, I see substantial risks for shareholders.
Given its penny-share status and small market capitalization of £65m, some good news could send Cineworld’s share price up considerably. We’ve already seen it this year, when even a rumor of interest from rival Vue sent the stock soaring.
In fact, Cineworld’s share price is up 31% in 2023.
But buying a stock solely in the hope of a surge in price due to news flow is speculating, not investing. As a long-term investor looking to buy big businesses at an attractive price, I find Cineworld a disaster.
It has destroyed shareholder value on a massive scale in recent years. The pile of debt may yet destroy what little value remains for shareholders. Even a penny share can be cheaper. I will not be investing.
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