It’s no exaggeration to say that Cineworld Group (LSE: CINE) has been a nightmare buy for me. This UK share’s lost a whopping 85% of its value since I bought in almost two years ago. The Cineworld share price could have further to fall if a second Covid-19 waves crushes the FTSE 250 firm’s plans to reopen its cinema network, too.
It’s no use punching the wall when your shares collapse in value. Extreme volatility is part and parcel of stock investing. What is important is to learn why your share buys didn’t work out so as to help you avoid making similar mistakes. Here are some nuggets of wisdom that I’ve taken from the crashing Cineworld share price:
Beware of debt-laden balance sheets
Cineworld had a lot of debt on its balance sheet when I bought the shares in October 2018. The acquisition of US cinema chain Regal Entertainment to create the world’s second-largest screen operator saw its net debt pile balloon to around $3.7bn.
Despite this, I was confident that the company’s management team would have a firm grip on the problem. I was also excited about its expansion into the world’s biggest cinema market in North America. The Cineworld share price traded on a forward price-to-earnings (P/E) ratio of around 14 times at that time, too, suggesting that the debt problem was reflected by that undemanding multiple.
The closure of its cinemas due to Covid-19 wasn’t something that I could have predicted when I bought in two autumns ago. But it’s a development that’s left management’s debt-cutting plans in tatters and made me think twice before buying shares with big debts again.
Diversification offsets the sinking Cineworld share price
Cineworld warned back in March that it could struggle to continue as “a going concern” because of its high debt pile. It’s reopening its cinemas again, but as Covid-19 infection rates spike across its major territories, the business isn’t out of the woods yet. The Cineworld share price could still theoretically go to zero.
The FTSE 250 firm’s travails illustrate perfectly the importance of creating a diversified stocks portfolio. Sure, the Cineworld share price has dropped by almost nine-tenths since I bought in. But this particular stock is just one of more than a dozen in my Stocks & Shares ISA. And my shares cover a broad range of industries so as to protect me from sector-specific problems like the mass theatre closures that have damaged Cineworld. This is why I haven’t lost any sleep over the chain’s sinking share price.
Is now the time to buy?
Cineworld, as I say has been a disaster for me. But could it be an attractive contrarian buy for investors right now? It remains laden with problems as, even if a new wave of Covid-19 doesn’t cause it to reclose its cinemas, social distancing rules will damage its ability to fill its theatres to the rafters.
On the other hand, though, right now the Cineworld share price trades on a rock-bottom P/E ratio of just 3 times. If it can overcome its current problems then it will be in the box seat to ride the booming global box office and possibly deliver exceptional shareholder returns. At current prices it could well be worth a speculative buy.
