Could penny stock Cineworld be the bargain of the year?

Sometimes when I hear about penny stocks, I draw a total blank. His name is unfamiliar to me and I don’t know much about the business.

That is not small when it comes to explaining Cineworld (LSE: CINE), though. The chain is well known. His name is on lights in cities and towns across the country. Indeed, the company also operates thousands of cinemas around the world, including in the main US market.

Despite this, Cineworld is a penny stock.

The shares are selling for about 5p each. That’s a nearly 99% slide from 2019’s high, before pandemic restrictions hit the business. If I were to invest £1,000 today and then Cineworld could go back to their old prices, my investment would be over £60,000! If that happens, Cineworld could be the bargain of the year (or even the decade) for my portfolio.

But how likely is it?

Who has what

I think it is very reliable.

Cineworld is doing good business even now. It has broad brand recognition, large properties, and a lot of expertise in running theaters.

But it also has debt. A lot of debt. In fact, the company’s net debt in interim results was $8.8bn.

Why is it important when it comes to Cineworld shareholders?

If I buy a penny stock today, I get a very small claim on the company’s assets, along with all the other shareholders. But shareholders are below creditors when it comes to major claims on company assets.

With net debt of $8.8bn, it is clear that many creditors want to get their money back from Cineworld now or in the future. If that drives the company into bankruptcy, there may be nothing left for the shareholders (some parts of the business are already in the form of bankruptcy protection known as US Chapter 11, although it may emerge in the future).

Even if the company avoids bankruptcy, its enormous debt burden will consume any earnings it will make for years or decades to come.

Big risk

Either way, I see huge risks for shareholders.

Given its penny stock status and small market capitalization of £65m, some good news could send Cineworld’s share price soaring. We have seen that this year, despite rumors of interest from rival Vue, its stock has risen sharply.

Cineworld’s share price will increase by 31% in 2023.

But buying stocks only in the hope of a sudden price increase due to news flow is speculation, not investment. As a long-term investor looking to buy a big business at an attractive price, Cineworld looks like a disaster to me.

It has eroded shareholder value on a massive scale in recent years. A pile of debt may erode what’s left of shareholder value. Even penny stocks can be cheaper. I will not invest.