The Cineworld (LSE:CINE) share price has exploded higher today. As I write this, shortly after lunch, shares in the cinema operator – which filed for ‘Chapter 11’ bankruptcy protection in the US in September – are up about 160% for the day. However, earlier on, they were up more than 200%.
So, what’s behind this huge share price spike? And is Cineworld stock worth buying for my portfolio now that it’s on the up?
Why Cineworld’s share price just spiked
The main reason the share price has skyrocketed today is that yesterday, Cineworld (which recently advised that it was seeking to implement a de-leveraging transaction to reduce its debt and capitalise on its business strategy as part of its Chapter 11 case) announced a bankruptcy settlement with its landlords and lenders. This will allow the cinema operator to borrow an additional $150m and make a $1bn debt repayment.
Previously, landlords and creditors had been opposed to the company’s billion dollar debt repayment plan. However, they dropped their opposition to the plan after Cineworld agreed to pay at least $20m in rent that will accrue after 30 September 2022. It had previously said that it didn’t intend to make any post-September rent payments until the end of its bankruptcy.
Cineworld also agreed to look into a potential sale of the company, and allow creditor input on its business plan going forward.
Did Cineworld just do a GameStop?
As for the magnitude of the share price increase (it’s not often you see a stock rise 200%+ in a single day!), I suspect there may have been a bit of a GameStop-like ‘short squeeze’ here.
According to my data provider, there were 23.4m Cineworld shares on loan as of yesterday. With the share price rising sharply this morning on the back of the bankruptcy settlement news, short sellers betting against the stock will have scrambled to buy Cineworld shares to close out their short positions. This will have pushed the share price up even higher.
Should I buy Cineworld shares today?
As for whether I’d buy Cineworld shares today, I’m not convinced that they offer an attractive risk/reward proposition from here.
No doubt, the bankruptcy settlement news is a positive development. The settlement means that Cineworld, and its shareholders, live to fight another day.
However, this development doesn’t change my view that Cineworld is a risky stock.
Debt on the balance sheet remains worryingly high. At 30 June, bank and other loans amounted to just under $5bn while net debt was $8.8bn. It’s fair to say that Cineworld is going to have its work cut out to service this level of debt (especially with interest rates rising).
Meanwhile, I think it’s likely that the Cineworld share price will be very volatile going forward. It’s worth noting that after hitting 9p earlier today, the stock then fell back below 6p (a 30%+ decline). This kind of stomach-churning volatility isn’t for me.
So, I’m going to leave Cineworld shares on my watchlist for now and focus on other stocks. All things considered, I think there are better stocks to invest in today.
The post Here’s why the Cineworld share price just jumped 200%+ appeared first on The Motley Fool UK.
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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.