The world’s second-largest cinema operator, Cineworld, has been top of the list of the most shorted FTSE 100 stocks since January. What’s the reason for this and what factors are weighing down the share price?
After reporting widened debts in 2021, Cineworld [CINE.L] shares have become a target for short sellers. The cinema chain topped the list of the most shorted FTSE 100 constituents, with 8.23% of its float currently being shorted as of June. According to Morningstar, Cineworld has been the most shorted stock on the index since January 2022.
The company reported largely promising full-year results for the 12 months ending 31 December after cinemagoers returned to the screens in the second half of the year. Revenue came in at $1.8bn, up 112% from $852.3m in 2020, while operating profit rebounded from a loss of $2.3bn to a slight profit of $15.8m. One figure in its full-year 2021 earnings that may have concerned investors is debt widening from $4.3bn to $4.8m, despite raising around $425m in liquidity. However, short sellers have looked to take advantage of this.
As of 10 June, data from the Financial Conduct Authority showed that the institutions that had a short position in Cineworld were: Highbridge Capital Management (1.68%), K2 & Associates Capital Management (1.03%), New Holland Capital (2.42%), TFG Asset Management (0.74%) and Whitebox Advisors (2.36%).
Liquidity and legal case headwinds
An increase in short positions isn’t out of the question. Cineworld is the subject of a pending legal case over its decision to walk away from a $2.1bn deal to buy Canadian cinema chain Cineplex [CGE.TO] in 2020. The Ontario court ordered Cineworld to pay damages of CA$1.23bn as well as CA$5.5m for lost transaction costs, though Cineworld has appealed.
The big worry is that if the appeal is unsuccessful, the company could collapse as “the group would not have sufficient liquidity to pay the existing level of damages awarded,” it warned in March. The damages it would have to pay are also far greater than its market cap, which as of 13 June was $323.7m.
The cinema chain is hoping a slate of summer blockbuster films, including Top Gun: Maverick and Thor: Love and Thunder, will boost its performance in the current fiscal year. Barclays analysts noted that movies will need to be released without delay “to help drive a sustained recovery in admissions,” according to the Financial Times.
“The company’s liquidity does not give much headroom if trading disappoints,” the analysts added.
How has the Cineworld stock been performing?
Despite the cinema industry’s post-pandemic recovery, the Cineworld share price’s recent performance has been a horror show. The stock is down 1.5% in the past month to close at 23.16p on 13 June. It’s fallen 27.6% since the start of 2022, while 66% has been wiped off its value over the past year.
Analysts are bearish on the stock in general. MarketBeat data shows it has five ‘sell’ ratings, although the consensus price target of 78p implies an upside of 237% from the 13 June closing price. Berenberg Bank gave the stock a ‘hold’ rating and set a price target of 85p, representing a 257% upside.
Bets against consumer spending stocks
With rising food and energy bills, consumers are likely to rein in their spending in the months ahead, which will likely hurt the pockets of some of the UK’s big consumer stocks. It should come as no surprise that FCA data indicates that short sellers are looking to exploit the weaknesses the cost of living crisis will create for retailers.
Retail and fast fashion brands dominated the line-up of the most shorted stocks on the FTSE 100. Kingfisher’s [KGF.L] share price is down 27.4% year-to-date as of 13 June and 6.8% of its float is currently being shorted. Asos’ [ASC.L] share price is down 49.4% year-to-date and 6.54% of its float is being shorted. The Currys [CURY.L] and Naked Wines [WINE.L] share prices have fallen 34.5% and 52.6%, respectively, while 5.5% and 5% of their shares are being shorted.