The Cineworld share price rocketed another 15% earlier this morning, complementing gains made earlier in the week. All told, the company’s valuation has increased a stonking 28% since Monday morning!
What’s behind this huge rise and should I consider finally taking a position in a company that I’ve been wary of for so long?
The Cineworld share price: what gives?
One might assume that recent gains are the result of some monumental news regarding the company’s financial position or some chink of light as far as reopening its screens is concerned. Not as far as I can see.
The only update to come out of the company in the last few days relates to the approval of an incentive plan for CEO Moshe Greidinger and deputy CEO Israel Greidinger. As a result, both are now in line to receive at least £33m each in shares if they are able to return the Cineworld share price back to 190p within three years. For context, the shares are changing hands for 83p each as I type.
I suppose another potential contributor to Cineworld’s share price rise over the past few days might be a ‘short squeeze’. This happens when those betting against the company rush to close their positions. This creates further upward pressure on the share price and results in an even bigger jump.
Reasons to be cheerful?
Could the share price target be hit? It’s not beyond the realms of possibility given that people may want to let off cinematic steam and flood screens once restrictions are lifted. One could also argue that a trip to the cinema is a relatively cheap form of entertainment and more likely to be popular in troubled economic times. Seen from this perspective, Cineworld could arguably be a better recovery play than, say, a struggling airline or holiday firm.
On top of this, an end to restrictions should allow frustrated studios to greenlight many more productions, generating excitement among filmgoers. Three years is surely a decent amount of time for Hollywood to get back to normal?
Then again…
Having said this, it’s still hard for me to overlook the challenges that Cineworld faces.
Right now, none of the company’s cinemas in the UK and the US are open, and huge job losses seem very likely in the next few months. The company is rolling in debt and may need further cash injections if films keep being delayed.
Whether the recent jump in the share price is the result of a short squeeze or not, Cineworld also remains one of the most hated shares on the London Stock Exchange according to shorttracker.co.uk.
Aside from all this, I have to question whether I want to own stock in a company that needs to provide an exceptionally large ‘carrot’ to management for merely performing its duty. Surely crises are when executives need to earn their already-sizeable salaries? Further incentives should not be necessary, I feel.
Bottom line
The big gains in the Cineworld share price over recent days will excite ‘traders’. As an investor, however, I’m steering clear. For me, there are simply less risky ways of trying to make money in the stock market. The most rational strategy, at least in my opinion, is to stick to buying quality UK stocks at reasonable prices and then do nothing.