Risk versus reward: it’s something that new investors need to weigh when considering whether to invest in certain stocks. Those risky opportunities for growth investors can be downright lucrative or portfolio breakers.
Here’s a look at two stocks that are risky opportunities for growth investors right now and whether they warrant an investment.
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Stock# 1: Cineplex
Cineplex (TSX:CGX) is the largest entertainment company in Canada. The company has suffered immensely as a result of the pandemic — perhaps more than almost any other company.
That’s because almost all of Cineplex’s revenue stream is based on gathering people together in confined areas. The movie-and-popcorn business has remained relatively unchanged for nearly a century. In short, the company charges people an admission, gives them a show to watch, and offers concessions for purchase.
Even Cineplex’s most successful efforts to diversify out of the theatre business, such as its popular Rec Room entertainment venues, are still reliant on people coming together.
Now that the pandemic is thankfully (hopefully?) coming to an end, there are three problems with that business model that make Cineplex a risky opportunity for investors.
First, there’s getting people back into theatres. People need to feel comfortable in returning to theatres. After more than two years of isolation, making the transition back into crowded, enclosed spaces can be tough. If anything, it may require incentives and discounts from the already stretched finances of Cineplex.
Second, let’s talk content. No matter how good the deal is to get people into theatres, it’s still very dependent on what Hollywood can churn out. That’s not a new dependency for Cineplex, but it has evolved in the past two years.
Specifically, the studios now have streaming platforms available to distribute content. In some cases, that content is slotted post-theatrical release as an additional revenue stream. In other cases, it’s exclusive content that is only available to streaming subscribers.
Finally, there’s the risk versus reward discussion. Can Cineplex recover? It seems likely it can, particularly given the slow progress the company has made in recent quarters. It will, however, take considerable time, and Cineplex may not recover fully to its former self.
As of time of writing, Cineplex trades at $9.40 and is down over 30% year to date.
Stock #2: Air Canada
Prior to the pandemic, Air Canada (TSX:AC) was one of the best-performing stock on the market over the past decade. The airline reported a series of record-breaking quarters and continued to expand and refresh its fleet while reaching out to new in-demand destinations.
Then the pandemic happened, and airline stocks imploded.
With aircraft grounded, and eventual re-opening guidelines that were based on requirements from both the arrival and departure ports was very slow and confusing.
As with Cineplex, an apprehension towards gathering in close quarters is also a concern. If anything, it has been more severe with Air Canada. Think about that for a moment. Passengers are seated together for prolonged periods of time in a small, enclosed space.
If that were the only consideration for Air Canada, it would be a risky stock for some, but there’s still another point to mention. Fuel prices remain high. This has the potential to cut into earnings and force the airline to raise fares or impose more fees, which will shutter demand.
Fortunately, the airline is recovering. A nearly 400% increase in revenue in the most recent quarter shows that. But, like Cineplex, there’s still a long way to go. By way of example, the airline posted an operating loss of $253 million in the most recent quarter.
That’s a solid improvement and the best result since the pandemic started. Unfortunately, it’s still a whopping loss that puts everything into perspective.
Risky opportunities for growth investors are everywhere
Every stock carries some risk. That includes even the most defensive stocks on the market. In the case of the above, that risk might be too great for some.
The volatility we’ve seen in the market this year has put a discount sticker on some of the best stocks on the market. That includes some stellar options that, in some cases, offer juicy dividends.
In my opinion, that risk isn’t worth the reward just yet.
