Cineworld’s share price tanked 21% in October! Here’s what I’m doing now

October proved to be a miserable month for the Cineworld Group (LSE: CINE) share price. During the course of the month the leisure giant lost 21% of its value.

The Cineworld share price has long been one of London’s most shorted. And latest data from shorttracker.co.uk shows that institutional investors and hedge funds increasingly believe that it will sink. As I type, a huge 9.1% of its shares are being shorted, putting it comfortably at the top of the list.

London’s most shorted

As a quick reminder, as The Motley Fool explains here, the process of shorting “involves an investor borrowing and selling shares they do not actually own in the hope of repurchasing them at a lower price at a later date”. They’re betting on buying back the stock at a cheaper price than they sold it for, returning it to the broker or investor they originally bought it from and pocketing the difference.

The investors who reckon Cineworld’s share price will fall don’t always get such calls right. Share prices can go up as well as down, of course. But I think it’s worth taking notice of what highly-experienced hedge funds and institutional investors are saying. In fact, I have to agree with the rising sense of pessimism regarding the cinema chain’s share price.

Covid-19 fears worsen

Cineworld slumped in October as concerns over the Covid-19 crisis grew. In particular UK share investors are fearing the worsening public health emergency in Britain and whether harsher social distancing measures — or possibly even full lockdowns — will be imposed again. This could prompt Cineworld to reduce capacity in its cinemas again or perhaps shutter them entirely.

Critically however, coronavirus infection rates haven’t ballooned in the US. This is important because Cineworld sourced around three-quarters of its revenues from the States prior to the pandemic. That said, it could well be a matter of time before the Covid-19 variants that have sent cases soaring elsewhere will land in the US. And this could have disastrous consequences for Cineworld given its massive debts.

Why I worry for Cineworld’s share price

Not all news flow has been terrible for Cineworld, however. Ticket sales have been strong since the mass reopening of cinemas earlier in 2021. And more recent blockbusters like Dune and James Bond outing No Time To Die have continued pulling viewers in large numbers.

What’s more, media analysts are also expecting soaring advertising spending in cinemas to continue. The Advertising Association and WARC’s latest report suggests ad budgets in cinemas will balloon 123.2% in 2022, up from the 88% rise estimated for this year.

It’s my opinion, however, that the risks of buying Cineworld far outweigh the potential benefits. Buying this particular leisure stock during the Covid-19 crisis is especially dangerous given its near-$5bn net debt pile. Then there’s the long-term threat posed by the streaming giants like Netflix and Amazon as viewer habits change. This is why I’d avoid Cineworld’s sinking share price and find other UK shares to buy right now.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and Netflix. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.