Following a difficult two-year period for the box office, Hollywood is attempting to pick up the pieces left by the disastrous COVID-19 pandemic. Due to heavy restrictions against non-essential activities combined with societal fears of the mysterious SARS-CoV-2 virus, cineplex operators such as Cinemark (CNK) could do little other than hope for the best. However, with normalization trends on tap, circumstances appeared somewhat favorable for CNK stock.
Indeed, the vaccine rollout along with fading concerns about COVID-19 contributed to a gradual recovery in the movie theater industry. Unfortunately, what was dragging on the sector was the lack of a major Hollywood blockbuster. This paradigm changed dramatically with the release of “Top Gun: Maverick.” The film went onto break multiple records, in part because of consumers’ desire to recapture normal pre-pandemic activities.
Therefore, Disney (DIS) had high hopes for the much-anticipated debut of “Avatar: The Way of Water.” A sequel to 2009’s megahit “Avatar,” the original achieved all-time box office records with a $2.9 billion gross. Further, analysts anticipated that opening weekend numbers will reach up to $175 million in North American theaters.
Unfortunately, the debut – which occurred last weekend – didn’t quite live up to the hype. Domestically, the Avatar sequel rang up $134.1 million. While it gave director James Cameron his first $100-million opening weekend, the shortfall against expectations hurt Disney’s valuation.
In turn, CNK stock suffered a significant hit as well. On Tuesday, shares dropped 5.15%. And in the trailing five sessions, Cinemark is staring at a 24% loss. Though it wasn’t the debut that investors had hoped for, a little patience may be in order.
CNK Stock Becomes the Subject of Unusual Options Activity
Following the close of the Dec. 20 session, CNK stock lit up Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Usually, traders leverage this data to determine which securities may be due for big moves ahead.
Specifically, CNK’s volume level reached 68,295 contracts against an open interest reading of 175,300. Against the trailing one-month average, volume for the day spiked up 719.57%. Call volume hit 15,933 contracts versus put volume of 52,362. The implied volatility (IV) rank hit 68.15%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.
To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.
The IV low for CNK stock was 49.12% on Aug. 16, 2022. Two months later on Oct. 20, CNK hit its IV high at 88.17%. Prospective investors should note that per Barchart.com’s technical analysis gauge, CNK ranks as an average 88% sell. Decisively, the stock’s medium term and long-term indicators point toward a bearish outcome.
Interestingly, analysts maintain a bullish outlook on CNK stock but sentiment is waning. Three months ago, Wall Street experts pegged Cinemark as a “moderate buy,” broken down as four strong buys, one moderate buy and two holds. In the current month, the overall assessment remains the same. However, one analyst rated CNK as a strong sell.
Why Patience is a Virtue with Cinemark
Although historical performances are not guaranteed to repeat themselves in the future, the past may offer some comfort for CNK stock. At the very least, it might be too early to hit the panic button on the cineplex operator.
For one thing, the original Avatar got off to a slow start, only generating $77 million during its first weekend. However, it went onto to become the highest-grossing film ever. In addition – and very much worth paying attention to – the original debuted almost immediately following the pain of the Great Recession.
Moreover, the original enjoyed staying power, allowing for word of mouth to bolster box office receipts. Ultimately, the first Avatar garnered more than $2 billion from international markets. This time around, the sequel delivered a debut weekend of $300.5 million globally (excluding North America).
To be fair, China’s tally of $57.1 million was disappointing. However, context is vital: the country has long been grappling with draconian zero-COVID policies. Remove these restrictions – a circumstance that may develop in earnest over the next several weeks – and we may have a completely different narrative.
Therefore, the current bearishness in CNK in both the open and derivative markets may be a knee-jerk reaction. Drill into the details and the circumstances for Cinemark are not that bad. Indeed, they could be attractive for contrarian investors.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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