There’s a NEW most-hated stock on the market. Do you own it?

The shorters are circling this FTSE 250 (LON:INDEXFTSE:MCX) stock. Here’s what Foolish investors need to know.

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There are few things more troubling to an investor than discovering that one of the companies they own features on the list of those attracting the most attention from short sellers (those betting on share prices falling). One thing more troubling is when the same business has moved up to become the most hated stock around — above battered firms such as Debenhams, Thomas Cook and Metro Bank.

Unfortunately, that’s exactly what’s happened to a household name from the FTSE 250, at least according to shorttracker.co.uk. And, no, it’s not a struggling retailer or a risky oil play. 

Debt-ridden

Shares in Cinema chain Cineworld (LSE: CINE) have fallen heavily in recent months and, based on shorting activity (11.5% at the time of writing), a significant minority of traders think there’s more pain to come. 

Much of the concern appears to stem from the company’s takeover of US rival Regal Entertainment and the huge impact this has had on its balance sheet. In August, Cineworld sought to quell these fears by announcing that reducing this burden was “ahead of schedule” following the repayment of $570m in term loans. Nevertheless, recent share price action (and the fact that adjusted net debt of $3.3bn is still almost 20% more than the company’s entire market cap) suggests that not everyone is convinced this sort of progress will continue. Nor does everyone think that synergies from the acquisition will come in as high as the estimated $150m. 

But debt isn’t the only potential weakness in the investment case. 

As star fund manager Terry Smith remarked during a speech earlier this year, most companies involved in the entertainment industry in some capacity have very little visibility when it comes to predicting earnings. Even critically-acclaimed films can do badly and ‘guaranteed blockbusters’ can bomb. On top of this, cinema operators have to contend with the growth in popularity of streaming services such as Netflix, Amazon Prime and, more recently, Disney+ (although the last of these won’t become available in the UK until next year). This doesn’t necessarily spell doom for trips to the flicks, but it must be considered by anyone thinking of investing. The more popular streaming becomes, the more management need to drop prices to lure people out of their homes. That’s particularly problematic for companies such as Cineworld considering the amount of money it is spending refurbishing its screens. 

Contrarian bet?

Having lost a third of their value since April, the shares currently trade on just 8 times forecast earnings. That’s usually the sort of valuation that gets value investors salivating. The company is also expected to return a total of 18.3 cents per share in the current financial year, which equates to a chunky yield of 7.1%. At the moment, it looks like profits will cover this amount. However, the aforementioned risk of earnings underperformance if presumed hits like the new Star Wars, James Bond and Top Gun films fail to grab audiences could make the threat of a cut more likely. 

There’s something in the suggestion that cinemas might be more resilient in the event of an economic downturn when compared to other, more expensive forms of entertainment, but I struggle to believe that operators such as Cineworld will thrive in such a scenario. Factor in the short interest, and I’m content to let this ‘opportunity’ pass me by.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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