Cineworld (LSE:CINE) was the beloved COVID recovery trade for thousands of investors during the dark days of lockdown after Christmas last year. Investors were betting that the cinema group would bounce back once restrictions were eased and people started going back to the cinema.
What’s gone wrong with the Cineworld share price?
Hedge funds seem to be largely in agreement on Cineworld and the company is now the most heavily shorted stock in the UK. Despite the brief rally we saw in the stock recently, Cineworld shares continue to trend downwards.
The other major factor which investors may have failed to consider in Q1 was the impact of streaming. The rise of Netflix and Disney+, especially during the pandemic, has been a game changer for cinemas. On top of that, while people have returned to cinemas, they have not returned in the numbers we saw pre-pandemic, and we must ask the question, will they ever?
So who is shorting Cineworld?
There are now quite a number of hedge funds with declared short positions on Cineworld stock. They are led by Whitebox Advisors which has been increasing its short position since July. Highbridge Capital Management is also short Cineworld but came later to the party, with a disclosed position of 1.14% in September.
Other hedge funds with substantial short positions on Cineworld include AHL Partners and Polygon Global Partners, although it looks like Polygon is currently trimming its position.
Investors are going to be watching Cineworld closely as we move into the Christmas holiday season. There have been some slightly hysterical headline numbers bandied around in the media which short traders should be a little cautious about – a 14% jump in Cineworld shares is a small rise relative to where the stock was six months ago.
Can Cineworld turn this around though?
Cineworld reported its UK and Ireland business was operating at 127% of its October 2019 levels, which is probably what spooked Polygon a little. Big blockbusters like Dune and Venom, which are usually released in the summer or over the Christmas period, have likely helped in this respect.
Further blockbusters are queued up for the cinema operator, as there is a backlog of films that were in production as the world went into lockdown, and which have now been completed. Among them are Ghostbusters: Afterlife and Spider-Man: No Way Home.
“I would especially highlight the great performances we saw from our newly refurbished cinemas in the US,” said Mooky Greidinger, CEO of Cineworld. “These new cinemas clearly support our strategy to enhance the cinema experience for all our customers.”
Will hedge funds back off?
Some hedge funds are turning a little cautious on this trade now: we note that New Holland Capital has now taken its money off the table against Cineworld.
According to Stockopedia, Cineworld is still looking like a highly speculative, mid-cap play. It is now very cheap, but the operating margin and the return on equity are a nightmare for this stock. Despite the positive traffic numbers in October, we are not seeing larger investors buying back into the stock. The street looks unconvinced on this one.