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Sometimes when I hear about penny stocks, I draw a total blank. Its name is unfamiliar to me and I have no idea of the work involved.
This is not the case when it comes cinemaworld (LSE: CINE), though. The chain is known. Her name appears in lights in towns and cities across the country. In fact, the company operates thousands of cinemas all over the world as well, including its main market in the United States.
Cineworld, though, is a penny stock.
The shares sell for about 5 pence. This is down nearly 99% from its highs in 2019, before pandemic restrictions hit business badly. If I were to invest £1,000 today and then Cineworld could go back to their old price, my investment would be worth over £60,000! If that happens, Cineworld could turn out to be the deal of the year (or even contract) for my file.
But how likely is that?
Who owns what
I think it is very unlikely.
Cineworld has the makings of good business so far. She has extensive brand recognition, a large holding, and plenty of experience when it comes to running movie theaters.
But she also has debts. Lots of debt. In fact, the company’s net debt in its interim results was $8.8 billion.
Why does this matter when it comes to Cineworld shareholders?
If I buy the little share today, I actually get a very small claim on the company’s assets, along with all of the other shareholders. But shareholders rank lower than creditors when it comes to the ultimate claim to a company’s assets.
With a net debt of $8.8 billion, it’s clear that a lot of creditors will want to get their money back from Cineworld either now or in the future. If that pushes the company into bankruptcy, shareholders may have nothing left (some parts of the business are already in the form of bankruptcy protection known as Chapter 11 in the US, though they may get out of that in the future).
Even if the company avoids bankruptcy, the massive debt load will likely eat up any profits it makes for years or decades to come.
Either way, I see significant stakes for shareholders.
Given its small cash position and small market capitalization of £65m, some good news could send Cineworld’s share price up sharply. We’ve already seen that this year, even as rumored interest from rival Vue saw shares rally strongly.
In fact, Cineworld’s share price is up 31% in 2023.
But buying a stock with the hope of a sudden price jump due to the news flow is speculation, not investment. As a long-term investor looking to buy into a big business at a bargain price, Cineworld seems like a disaster to me.
It has destroyed shareholder value on a massive scale in recent years. The debt pile so far may destroy what little shareholder value is left. Even a penny stock can get cheaper. I will not invest.