Cineworld (LSE: CINE) shares are hot right now. Last week, Cineworld was the fourth most purchased stock on the Hargreaves Lansdown investment platform.
It’s not hard to see why investors are piling into the FTSE 250 stock at the moment. This year, Cineworld has been hit hard by the coronavirus pandemic and its share price has tanked. The successful rollout of a Covid-19 vaccine, however, could change the outlook for the cinema operator dramatically. Since Pfizer announced that it has developed an effective vaccine, CINE shares have staged a spectacular rebound.
I think Cineworld shares could potentially keep rising in the short term. Right now, there’s a lot of optimism towards stocks that were crushed during the pandemic. That said, I wouldn’t buy the FTSE 250 stock today. Here are three reasons why.
Cineworld has a monstrous debt pile
One thing that concerns me about Cineworld is the mountain of debt on the company’s balance sheet. In a recent update, the company advised that it now has aggregate gross debt financing of $4.9bn. When you consider that viewers are unlikely to rush back to cinemas post Covid-19, this amount of debt adds a lot of risk to the investment case. A recent article in The Financial Times suggested that even if lockdowns end and viewers return, Cineworld may need shareholders to inject as much as $2bn into the company, or risk lenders taking control. This kind of capital raising could limit share price upside.
Viewer habits are changing
Another issue that concerns me is viewers’ habits. These may have been permanently altered by the coronavirus pandemic. These days, a lot of people have large televisions at home. Many people also subscribe to streaming platforms such as Netflix, Disney, and Amazon Prime. With filmmakers now starting to release movies direct-to-consumer (such as Borat Subsequent Moviefilm) through these platforms, the cinema industry could be set to face massive structural challenges in the years ahead as people opt to watch films at home.
Hedge funds expect Cineworld’s share price to fall
Finally, it’s worth pointing out that Cineworld is currently the second most shorted stock in the UK according to shorttracker.co.uk. At present, eight funds have short positions over 0.5%, with total short interest amounting to a high 8.8%.
This level of short interest is worrying. It suggests that hedge funds are betting heavily that Cineworld’s share price will fall. Short sellers don’t always get it right, of course. But quite often, they do. Carillion, Debenhams, and Thomas Cook are three UK stocks that have been heavily shorted in recent years and look what happened to them. I wouldn’t want to bet against the short sellers.
Better stocks to buy
Overall, Cineworld shares look risky to me. The balance sheet is awful and the company looks set to face structural challenges going forward.
All things considered, I think there are much better stocks to buy right now.
