On the surface, circumstances don’t appear particularly compelling for Cinemark (CNK). Fundamentally, as a cineplex operator, CNK stock incurs the risk of losing relevance to streaming providers such as Netflix (NFLX). Further, disappointing earnings and seemingly bearish activity in the derivatives market point to further erosion. Nevertheless, intrepid speculators may want to keep close tabs on the entertainment enterprise.
But to start the discussion, those on the bearish side of the camp have plenty of ammunition to fire. First and foremost, the fundamentals for CNK don’t appear encouraging at all. For example, Cinemark came out with a quarterly loss of 82 cents in its latest fourth-quarter earnings report. However, Wall Street analysts anticipated that the loss would on average come out to 34 cents.
Conspicuously, the red ink clashed with positive earnings of 5 cents in the year-ago quarter. Furthermore, over the last four quarters, Cinemark beat earnings per share estimates only two times. On the top line, the company posted revenue of $599.7 million. Fortunately, this tally surpassed the consensus target by 5.5%. Nevertheless, one year ago, Cinemark posted sales of $666.63 million.
Overall, then, it wasn’t a great look. In addition, some market experts identified CNK stock as one of the entertainment firms to short, citing in part the aforementioned Q4 earnings report and an overall poor financial posture.
Coincidentally, CNK stock represented a “lowlight” in Barchart.com’s screener for unusual stock options volume. Specifically, total volume on March 23 came out to 13,297 contracts against an open interest reading of 105,238. The delta between the Thursday session volume and the trailing one-month average volume came out to 642.43%.
Notably, call volume reached only 1,125 contracts, while put volume dominated at 12,172. This gave way to a put/call volume ratio of 10.82, on paper dramatically favoring the bears. Still, for all the troubles, daring speculators may want to go contrarian on Cinemark.
Why the Opposite Narrative Might Pan Out for CNK Stock
While we can go over the granularity of Cinemark’s poor financials and its lackluster Q4 report, at the end of the day, the bottom line is the bottom line. So far this year, CNK stock gained a massive 57.24%. You can call it reactionary, especially amid the broader framework of a trailing-year loss of 22.62% – that’s totally fair. However, for now, investors appreciate the upside opportunity in Cinemark.
Also, it’s worth noting that in the past five sessions through March 23, CNK stock gained over 5%. For the S&P 500 index during the same period? We’re talking a blip (0.16%) higher.
More importantly, Cinemark against the bigger picture may actually benefit from slightly worsening economic conditions. Historically, the box office provided morale boosts during periods of sustained hardships. For instance, Hollywood played a strong psychological role during the Great Depression, providing reassurances to a demoralized nation.
More recently, during the Great Recession, box office sales increased in 2009. For full disclosure, several movie studios suffered financial damage, resulting in layoffs and budget cuts. Still, the underlying narrative is that during this downturn, the public still wanted their entertainment.
Even during the COVID-19 pandemic, the phenomena of retail revenge and revenge travel clearly demonstrated a major theme: despite financial troubles, Americans need to let off some steam. And they’ll pay money (within reason) for such psychologically satisfying entertainment.
And the pricing component is also where Cinemark – and by logical deduction CNK stock – may benefit. Let’s be real, going to the movies has increasingly become an expensive endeavor. However, it’s not as if the box office saw price increases and every other entertainment platform’s pricing remained pegged to pre-pandemic norms.
No, quite the opposite – we’re seeing price increases virtually across the board. Thus, on a relative basis, Cinemark offers attractive entertainment, meaning CNK is worth a shot for speculators.
Not Ignoring the Risks
To be sure, the above analysis does not mean that investors should throw caution to the wind regarding CNK stock. Financially, the company suffers from many warning signs, including a distressed balance sheet and key growth metrics that fell into negative territory over the past three years.
However, we also must consider that for practically all of 2020 and much of 2021, large cineplex operators were shut out of business due to no fault of their own. Therefore, investors should recognize the context of the financial numbers and not just the numbers themselves.
Nevertheless, with the steady normalization of society, the box office may benefit as the low-cost provider of public entertainment solutions. So long as the economy doesn’t completely melt down, CNK stock should be attractive to market gamblers.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
