The Cineworld (LSE:CINE) share price has had a reasonably good start to 2021, increasing by more than 40% year to date and up nearly 50% over the last 12 months. However, over the past couple of weeks, the stock has been on a downward trajectory.
Despite the initial allure of cinemas reopening in the US and UK, it seems investors are growing more sceptical of the firm’s ability to make a successful recovery. In fact, a closer look reveals a rise in short positions being placed against the Cineworld share price that correlates with its recent poor performance. Do these short sellers know something I don’t?
The bear case for the Cineworld share price
Today, 7.38% of Cineworld shares are being sold short. And that number appears to be rising with each passing week. This means that various funds and individuals are betting that the Cineworld share price will fall. The level of short positions is much less than the 14% recorded during 2020. But it is still quite significant when compared to the pre-pandemic level of 3.5%.
Short selling can end quite badly if an investor is wrong. However, in the case of Cineworld, there are some valid reasons to be sceptical about its share price. The company has employed an acquisitive growth strategy for many years. This did enable it to become the second-largest cinema chain in the world. However, as a consequence, it racked up a lot of debt, which was further increased once the pandemic hit.
As of the end of 2020, Cineworld had $8.3bn of debt & equivalents on its balance sheet versus a cash war chest of merely $337m. Needless to say, the firm is highly leveraged. And even before the pandemic made things worse, the company saw most of its operating profits disappear simply to cover interest expenses.
It’s not all bad news
Cineworld is hardly in the best financial health at the moment. And while I believe this will remain an issue for several years to come, there are reasons to be optimistic.
After a year in lockdown, there appears to be a substantial build-up of demand from movie-goers to return to the big-screen experience. Godzilla vs Kong was released in late March this year when a large portion of Cinemas remained closed. And despite Warner Bros offering a home streaming option, the film outperformed expectations by a significant margin.
With a long list of delayed titles finally making their debut this year, it looks like Cineworld is about to enjoy the return of a steady flowing income. And provided there are no further disruptions to its operations, the Cineworld share price may be able to begin climbing again.
Time to buy?
All things considered, I’m not interested in owning shares in this business. The enormous pile of debt adds a considerable level of risk. And this appears to be the catalyst driving the increasing number of short positions. Only time will tell whether the Cineworld share price can make a successful recovery. But personally, I’ll be looking elsewhere for growth opportunities.
