**This is a transcription of the video above. Watch our Canadian Stocks To Avoid In August directly on Youtube**
What’s up everybody, welcome back to the channel.
Typically we go over, on a weekly basis, some of the best stocks to buy in the country, Canadian stocks, Canadian stocks only.
But this week we’re going to do something a little different, and we have done it before. But I feel right now is more important than ever to be going over a couple stocks that we would highly suggest Canadian’s avoid right now.
These are stocks that have severely dipped in price, so they present somewhat of a value trap. But the problem is, the current economic crisis we’re in and the economic conditions moving forward is not bode well for these companies and in our opinion they are going to struggle mightily moving forward.
And we fielded a lot of questions on these stocks over the last few weeks. Which means investors are considering buying them right now, which may be a mistake.
So with that being said, lets go over some Canadian stocks that we are avoiding in the month of August.
So before I get started, big thank you first to the over 70 Youtube subscribers that joined us over at Stocktrades Premium last week when we offered that huge discount. It is expired now, unfortunately you’ll have to catch us next time.
So, the first stock to avoid in August at all cost in Cineplex.
They trade under the ticker TSX:CGX on the TSX, and this is a Canadian stock that has actually had a ton of interest from investors as of late. And i really think this comes from the fact that it is driven into new investors heads to buy low and sell high.
So when they see a popular brand like Cineplex that is trading significantly below its 52 week highs, they tend to think there is some sort of value there. But the fact is, the stock market is a representation of the actual companies behind the ticker. it is not just a ticker symbol that has a dollar value.
Cineplex is cheap because it should be cheap right now.
Just a quick look at their balance sheet, and we can see how dire the situation really is.
If you look at cash and cash equivalents, the company has spent 72.6% of its cash in a single quarter. Accounts receivable have gone down over 52% and if we look at total current assets, they have around $139 million.
But if we head down to current liabilities, we can see that the company has over $462 million dollars in current liabilities. With about $143 in accounts payable, and just over $115 million in lease obligations. So essentially Cineplex, over the next year owes significantly more money than it has to pay.
And there are some situations where a company can turn around a balance sheet like this, but the issue with Cineplex is they still aren’t operational. When you have a company that is in this poor of financial shape and they have absolutely no way of getting out of it because they have no way of generating revenue right now as theaters are shut down during the pandemic, or if they’re open they are playing outdated movies with low attendance, there simply is no way for the company to get out of this situation except to issue more equity in the form of shares, or debt.
This, in turn, could cause the stocks price to fall even further.
The Cineworld deal in 2019 was a catalyst
Now another reason investors were buying up Cineplex, and this was probably pre-pandemic, I think a lot of people figured out this deal was not going through after a while, was the Cineworld acquisition.
So Cineworld essentially said they will pay $2.8 billion dollars, or $34 a share, to Cineplex shareholders to buy out Cineplex. And the market at first reacted to this news, the stock jumped, and people who sold out at that time made the absolute right decision. Because after a while, it became clear that this deal was not going to go through, and in mid June Cineworld officially cut ties with Cineplex and walked away from the deal completely.
As a world, Cineplex’s shares sold off even more, as people who were desperately holding on to them in hopes of that deal being finalized just dumped them.
Now there’s a few things about this Cineworld deal that is going to put more downward pressure on the stock. As I said, investors are dumping shares that were hoping that deal would get put through, but there’s also litigation.
Cineplex is suing Cineworld, saying that the company had buyers remorse, where Cineworld says that Cineplex had a breach of contract and there was material changes in the deal. So this is something that is not going to end any time soon. And you have a worldwide pandemic that is crippling CIneplex’s revenue, causing people to stay home, not go to theaters, and then on top of that you have litigation costs.
It’s not cheap for these companies to run the lawyers they do. And this could be tied up in the courts for years costing more money for a company that just doesn’t really have that much to burn right now.
Even if COVID didn’t exist, Cineplex would struggle
So hypothetical situation, if COVID simply vanished tomorrow, everything went back to normal, it would still be tough sledding for Cineplex moing forward, because movie production has been delayed. So you essentially have theaters open, that don’t have any movies to draw customers in.
I’m not a believer that the cinema industry is dying, I still think that people enjoy going to the movies, eating the food, seeing movies on the big screen, but the thing is, they have to be blockbuster style movies.
If this all subsides by the end of the year, Cineplex reopens, but movie production has been delayed, they are going to struggle significantly getting people to come in to watch the movies. Not to mention that, I would say it is a very safe bet that these movie theaters will not be full until there is a vaccine, or at least a very strong treatment for COVID-19.
So not only will they be showing outdated or older movies that will struggle to draw in a ton of customers, they’ll also have to run those theaters at half, or maybe even 1/3 capacity. And for a company that has the liquidity to survive the year, there is a potential for a bounceback.
The issue with Cineplex, is they simply have no cash and they are not in a very good financial position right now to weather a continued storm, that is pretty much inevitably going to happen to the theater and cinema world.
The film industry is shifting, which is not good for Cineplex
Now even if Cineplex makes it out of this alive, we can see that there is a massive transition happening in the film industry, and will more than likely be the final nail in the coffin of these companies, if it is succesful. And that is the strong transition we’re seeing right now for movies to premiere digitally.
Like I mentioned before, Mulan, huge blockbuster, would have drawn massive crowds at the theaters, is now premiering digitally on Disney Plus.
And yes, this movie will cost more to consumers, but in the end it’s still going to be cheaper than going to a movie theater. And the thing is, a company like Disney with Mulan, if they were to have it in the theater they would have to pay out a portion of the revenue to the theater to host the movie.
There are a lot of extra costs incurred, whereas if Disney Plus just hosts it on their own platform, they get 100% of the revenue, they get 100% of the data of the people watching the movie, and if it proves to be profitable, this is going to be a business model that a ton of studios develop. Which, is absolutely terrible news for Cineplex.
Cineplex lost nearly $3 a share in the first quarter 2020 earnings report, and this isn’t even with full COVID implications. Next quarters earnings are going to be significantly worse, and analysts don’t really think it’s going to get any better for the company any time soon.
Revenue is going to drop sharply for Cineplex
They predict in 2020 that CIneplex’s revenue is going to fall by approximately 53%, and in 2021 they think revenue will drop by yet another 20%+. These are impacts on revenue that very little companies would have the strength to survive.
And a lot of those companies are in better financial shape than Cineplex. Overall, not only will Cineplex be a poor investment moving forward, but it has also been a poor investment for current investors over the last half decade, as they’ve watched a $10,000 investment in the company shrink down to about $1500 today.
And the longer it takes to develop a vaccine and overall eliminate COVID-19, the longer the restrictions are going to be placed on these companies, the longer their revenue will be impacted severely, and the increase risk of the companies essentially going bankrupt will always exist.
Sienna Senior Living (TSX:SIA)
So another industry that has been hit very hard by this pandemic is long term care facilities. And it does make sense, they have a older portion of the population in the facilities. As a result, there is a ton of lawsuits that are coming out from this, and Sienna Senior Living is not immune to any of them.
In fact, in mid July the company was hit with its third multi-million dollar class action lawsuit. Essentially claiming negligence for its facilities not doing enough to prevent COVID-19 getting in, and when it did get in, not doing enough to contain the virus.
There was rumors that these long term care facilities were trimming down on staff prior to the pandemic, and as a result they didn’t have enough staff on hand to prevent the spread of the virus once it got in to the long term care facilities.
Overall, it just doesn’t look good for companies like Sienna Senior Living, and with these class action lawsuits, if there does end up being negligence, Sienna Senior Living may be responsible for some pretty heavy payouts to people inside of the class actions.
And this in turn could effect their cash flows, and thus their stock price moving forward for quite some time.
Sienna Senior Living is in a poor, but not dire situation
Sienna definitely is incurring a lot of expenses when it comes to COVID-19, and will probably incur a lot moving forward as they have to spend more money to insure the integrity of the buildings, the safety of the residents and ultimately the long term well-being of the company.
But overall, their occupancy rates remain relatively high and they are still collecting a lot of the rent. Occupancy did drop from around 97.6% to 92.5%, but the company did state that the government in the case of a pandemic actually provides funding to Sienna Senior Living to cover this missed revenue.
The issue with Sienna right now is their dividend
That is one of the main reasons why we would suggest looking elsewhere right now. A lot of people are drawn to Sienna Senior Living because it yields around 9% at the time of filming. But the thing with a company yielding this high, is you really need to look at the fundamental strength of a dividend stock.
And with Sienna Senior Living, our dividend screener over at Stocktrades Premium would have told you, in about 5 seconds, that this dividend is on the verge of being cut.
The company currently has a payout ratio of around 1300% of earnings. And this isn’t a payout ratio that we like to get tunnel vision on. We like to expand and look at operating and free cash flows.
And unfortunately, for Sienna, it’s just as bad when looking at these numbers. The company is paying out around 94% of free cash flows towards the dividend, and around 73% of operating cash flows. This is a dividend that is simply unsustainable. Especially in the height of a pandemic, and we have no idea how bad revenue drops are going to get moving forward.
You want a company that is going to be able to pay its dividend safely over time, with the money they have now instead of taking on debt to pay the dividend.
Now is it possible that Sienna maintains this dividend. Absolutely, you might not see a dividend cut. But the fact is, this high yield right now, is boosting this company’s stock price. And they are already down nearly 50% year to date.
So because of the 9% yield, a lot of investors are buying this stock, bloating the price. And if they end up cutting that dividend, it could cause a significant drop in the stocks current price. Which could leave investors in a deep, deep hole. It is very, very important that you aren’t chasing stocks just based on high yields.
We’ve seen so many stocks during this pandemic cut the dividend, and investors have been left holding the bag and are now probably looking at a very long term recovery period, just to achieve their original capital. And that is if they didn’t sell their stocks for a loss after the dividend was cut.
Overall, we’d be avoiding Cineplex and Sienna Senior Living stocks
Investors are hopeful that a vaccine is coming in the near future. I am cautiously optimistic.
But what I do know is there is more than likely not one coming in 2020, and even if they did administer one, I find it very difficult to believe that they would be able to handle worldwide distribution in a very short amount of time.
The longer this pandemic draws on, the longer Cineplex is going to have to operate at lower capacities, and the bigger threat looms that more studios will move to a digital premier style method. And if that model proves to be profitable, it could definitely be the dagger in the heart of Cineplex.
In terms of Sienna, class action lawsuits are a difficulty. The dividend is teetering on the the brink of being unsustainable, if it isn’t already. And they are going to incur a lot of costs moving forward as long term care facilities are something that restrictions are going to be eased on, pretty much last.
There is also a risk of a second wave, more outbreaks in the facilities and as such there is a chance that even more class actions could pop up.