The penny stock Cineworld (LSE:CINE) has taken its shareholders on quite the roller-coaster ride these past few years.
After the pandemic decimated its business model, the cinema operator struggled to find the cash flow to service its enormous debt pile. Pair that with a botched takeover turned legal battle which the group lost, and it all culminated in a Chapter 11 Bankruptcy filing in the United States in September.
Consequently, the stock price since the start of 2020 has collapsed by more than 98%, leaving many investors with a bitter taste in their mouths. But just earlier this week, the share price erupted, surging by more than 180% in a single day.
What happened? And is this business finally making its long-awaited comeback?
Understanding Cineworld’s penny stock behaviour
Seeing single-day, triple-digit movements in a share price is rare for most businesses. Yet this sort of volatility isn’t too uncommon in the land of penny stocks.
There are undoubtedly many factors at play, especially on the short-selling side of the equation. But the main catalyst behind this recent upward trajectory was the announcement that management has reached a settlement with its landlords and lenders.
Without going too far into the weeds, the group is gaining access to a further $150m in debt financing. It’s also been able to wipe out $1bn from its existing pile of loan obligations. In exchange, management has agreed to pay $20m in monthly rent, opened the door to potential takeover offers, and invited its creditors to share input on its business strategy moving forward.
In other words, Cineworld may not be going under after all. Considering the fierce number of objections in the early stages of this bankruptcy saga, that’s quite a surprising outcome. Nevertheless, it’s terrific news for shareholders of this penny stock.
Time to buy?
As encouraging as this week’s announcement was, there remains a long road ahead for this business. And it’s not entirely out of the woods.
Even after eliminating $1bn of debt, that still leaves roughly $8bn of loan equivalents on its books. And with interest rates in the US and the UK still being hiked by central banks to combat inflation, it may need further help and cooperation from its creditors.
This near-term uncertainty will likely create intense volatility in both directions in the coming months. And even in 2023, a clear path to recovery may not have emerged for this penny stock. Furthermore, its weak financial position potentially opens the door to its healthier competitors seeking to gain market share as the next lineup of blockbuster titles emerges.
All things considered, Cineworld has undoubtedly taken a step in the right direction. But there are far better lower-risk investment opportunities to be found elsewhere today.
