After a free fall since 2021, Cineplex (TSX:CGX) and BlackBerry (TSX:BB) stocks made a vertical jump. Both were short-squeeze stocks of 2021, which artificially inflated the share price only to make profits from hedge funds with a short position in them. Is the latest surge in these stocks another round of short-squeeze, or is it a recovery rally?
Cineplex
The pandemic spelled the death knell for Cineplex stock as empty theatres made it difficult to maintain the theatres. And when they reopened in 2022, over-the-top (OTT) platforms had already changed the way people consumed content. All the past losses of 2020–2022 turned Cineplex share’s book value negative. The cinema chain has a debt of $1.9 billion and is paying interest of $152 million on this debt.
While Cineplex has managed to revive the movie magic and increase its revenue to the pre-pandemic levels, the high debt keeps the stock range-bound. Thus, its share price fell 56% from $16.40 in June 2021 to $7.10 in June 2024. Those who bought the stock in the 2021 short squeeze are still sitting on a loss.
Cineplex saw a recovery in July 2024 as the Bank of Canada began cutting interest rates. These rate cuts could reduce Cineplex’s interest expense and increase profits. After every quarterly earnings, the company saw a vertical jump, and the stock sustained the price. The share price jumped 18% within eight days after the second-quarter earnings release on August 9, 2024. The stock slipped slightly after the third quarter earnings but then surged 30% during the holiday season and blockbuster releases.
Is Cineplex stock a buy?
Cineplex stock has once again started descending as seasonal footfall fades. A cyclical stock like Cineplex could continue to fall in the first half. Now is a good time to sell while the stock trades above $11. This price will be difficult to sustain without blockbuster movie releases. Even if you are making a loss because you bought the stock above $15, it is worth the risk. You can reinvest that money in more promising growth stocks like Hive Digital Technologies and use the loss incurred from selling Cineplex to offset future capital gains from Hive.
BlackBerry
BlackBerry stock fell 80% after the 2021 short-squeeze rally increased the share price to $17.20. The company suffered from falling automotive sales as royalty from its QNX software used in cars kept piling up (US$815 million – 3.8 times its FY24 revenue). These royalties will only be unlocked when automakers produce cars. However, the rising inflation and semiconductor shortage dampened car sales in 2022, and demand never recovered. Moreover, companies delayed signing their cybersecurity contracts.
All these events saw BlackBerry burn cash and almost halve its cash in hand. In November 2024, BlackBerry reported its first positive free cash flow in six quarters. However, it is still far from overturning the revenue decline. Despite this, the stock saw growth momentum at the end of November and has surged 74% in less than two months.
While many believe that BlackBerry is once again a target of a short squeeze, the surge could also be over the anticipation of a revival in the automotive sector as Donald Trump takes U.S. presidential office. Lower corporate taxes could boost corporate spending in cybersecurity and the promotion of gasoline cars could drive car sales. Whatever the reason for this rally, is the share price sustainable?
Is BlackBerry stock a buy?
If you already own BlackBerry stock, it is a good opportunity to sell. The stock trades at 3.6 times its sales per share, which is high for a company with declining sales. It may not be a good idea to buy BlackBerry stock in the recent rally as the turnaround is yet to generate revenue growth. Cost cutting has limitations, but growing revenue is what drives a tech stock’s returns.
You could consider buying Advanced Micro Devices, which is seeing a revenue growth spurt thanks to its artificial intelligence (AI) data centre chip.