Is now the time to buy Cineworld shares?

After a massive fall last year during the coronavirus pandemic, Cineworld’s (LSE: CINE) share price has shown signs of a recovery this year. As present, its shares are changing hands for around 66p, which is significantly higher than the 2020 lows of around 15p.

Here, I’m going to discuss the outlook for Cineworld shares. I’ll also discuss whether I’d buy the stock for my portfolio today.

Where does the Cineworld share price go from here?

After a horror show last year, the outlook for Cineworld is definitely improving, in my view. Just look at the trading update posted by the company yesterday. In October, revenue was 90% of 2019 levels, boosted by movies such as No Time to Die and Venom. That represents a significant improvement on July’s figure of 50%. Encouragingly, the group generated positive cash flow in October.

It’s worth pointing out that other cinema operators have reported similar recoveries. For example, US rival AMC Entertainment recently said that October was its best box office month since the pandemic began. Cinemark said the same thing. Clearly, with Covid-19 vaccination rates up, people are now heading back to cinemas.

Of course, we can’t rule out further disruption. Here in the UK, Covid-19 cases remain high. However, I think it’s unlikely Cineworld will have to face the conditions it endured last year. Not only do we have booster shots being rolled out but we could also have Pfizer’s antiviral pill.

“We’re close to the end of the pandemic,” said Former US Food and Drug Administration (FDA) Commissioner Scott Gottlieb recently. This is good news for Cineworld, which generates a large chunk of its revenues from the US now.

It’s worth noting that analysts expect Cineworld to generate revenue of $1,935m this year and $3,893m next year. These figures represent a big improvement on the revenue figure of $852m posted last year.

This all leads me to believe that Cineworld’s share price could potentially have upside from here.

Still a risky stock

Having said that, Cineworld shares still look risky, to my mind. One reason I say this is that the stock is currently the most shorted in the UK. Shorting is the process of betting against a stock (ie the price will fall).

At present, Cineworld has ‘declared’ short interest of 8%, according to Financial Conduct Authority (FCA) data. However, data from 2iQ Research reveals that the real short interest figure is closer to 18%.

The fact that short interest is so high is a little concerning. It tells us that many hedge funds and other sophisticated investors are expecting the stock to fall from here.

As for why short sellers are targeting Cineworld, it could be related to the company’s balance sheet. At the end of June, the company had net debt of $8.4bn on its books. This is a problem, given that ticket sales and cash flows are still well off 2019 levels.

Should I buy Cineworld shares now?

Given the high level of short interest here, I won’t be buying Cineworld shares for my portfolio. I think there are much safer stocks to buy today.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.