October 28, 2020 12:22 AM

Entertainment stocks present intriguing opportunities in the post COVID recovery

From ravaged movie theaters to undervalued gaming developers, the entertainment industry in Canada offers a number of possibilities for investors looking to make powerful moves in the wake of the devastating COVID-19 pandemic induced economic crisis. Bold bargains and strategic foresight are key to turning this downturn into lucrative opportunities, but only if you make well informed decisions.

/ Published 2 months ago

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Unsurprisingly the entertainment sector has been one of the hardest hit by the COVID-19 crisis. The double threat of forced closures or dwindling clientele on top of the overall insecurity and loss in disposable income among millions have taken a considerable toll on some of the countries prior top performers. Some investors will see opportunities where others saw loss. We will try to cover three different sides of the sector, and help you find the opportunity that fits your style. 

The performance of different entertainment business models during the Covid crisis gives us as investors an interesting set of insights into the population’s expectations for the future. And helps us distinguish between those whose recovery is to be expected, and others where it is uncertain. 

Gambling big with casinos

Some of the biggest losers so far in the health and economic crisis have been the gambling institutions that normally draw floods of Canadians and foreign tourists. The usual throngs have slowed to a trickle and the dollars dried up with them. So much so that the impact went beyond the casino walls in some cities to hurt the overall economies as well.

Let’s look at a couple of different casino stocks to see if we can spot a trend. First a big one, Great Canadian Gaming Corp, they took an initial hit of almost 60% (45 to 19.7 CAD), and are still sitting at just over half their original value. Next a smaller one, Gamehost Inc which operates almost exclusively in Alberta, took a 56% hit (from 8.5 to 3.7CAD) and has risen to only 5.6, almost an identical pattern. It is also important to note how both recoveries have followed similar ‘flatlining’ trends after initial recovery rebound. 

There is obviously a huge potential, investments could nearly double in value once things return to normal, but the slow snail trend means that this is, at best, a long haul play. The heavy dose of uncertainty in the future is holding them down, but they may also be victims of other societal trends, the success of online better (despite canadian legislature holding up sports betting). 

Clearly casinos are a potential high reward placement, but must be considered with a dose of caution and an eye on the long, rather than short, term. But for the riskier rollers out there, they are a steal!

Mobile Gaming stocks offer safe choices and excellent opportunities. 

Gaming companies have had a much different story to tell than Casinos, as video games and mobile games are largely untethered to the physical economy. They have been able to scrape by solid revenues, or even growth, in these hard times. Unfortunately this also means that for the most part they do not offer as exciting an opportunity. 

Except…most of the companies who have benefited are the largest ‘big name’ brands, like Ubisoft. They are seen as institutionally stable despite the pandemic actually affecting their revenue slightly more (delayed releases and console sales have not helped), as a result their recovery was sharp and steep, and have recovered to pre-pandemic values. But the smaller canadian gaming companies like Leaf Mobile Inc (TSX.V: LEAF) have not. Yet. 

Mobile gaming pre-pandemic represented almost 60% of the sector’s revenue, a metric only likely to increase with the pandemic’s aftershocks. Yet the smaller actors in the sector have shown slower recovery, thanks in part to market uncertainty in the future generally. With clear paths to growth, however, and an obvious undervalue compared to other leaders in their field, companies like Leaf Mobile Inc make an excellent choice. Safer, and thanks to their mid-pandemic release of a new cannabis game, likely to surge in the short run.

Cinema Stocks still lag behind, for good reasons

Let us now turn to a third side of the entertainment industry, cinema. An obvious victim of the pandemic, as cinemas had to close fast, and have little way to recover value safely, while offering a product which (unlike casino’s) can easily be enjoyed at home. This explains the over 70% (33.3 to 8.8 CAD) crunch in the stock of companies like Cineplex, another TSX player. 

Their stock remains low, which might suggest an opportunity, but if we look more closely at their behaviour before and after the pandemic we might see why this thinking could be flawed. Before the Covid hit they were enjoying what seemed like a high…but it was a short term respite from a long term downward trend. No doubt a result of the weakness of their model in the face of changes in home and mass entertainment.

After the pandemic they saw an initial period of uncertainty as investors no doubt kept expecting a return or rebound, only to be denied by the reality of the economic situation. It has since settled near 9 CAD and budged little, despite reopenings just last week. We find this highly indicative of a lack of consumer interest and investor excitement in their model, and a good reason to avoid making plays in the cinema sector for now. 

Canadian entertainment industry hit hard, but recovery brings opportunity

The one downside of downturns like the one we are living through is the chance for brave or fortunate opportunities to make it big. Yet in their self interest they also provide needed funding, dynamism and optimism needed to kick our economy back into gear.

The entertainment sector is one particularly in need of revitalization at the moment, suffering greatly under the crisis. We hope to help our readers navigate the tricky waters of decision making during a crisis. And while we council against long shots like Cineplex, and for safer bets like Leaf Mobile, whose new countercultural game has been a bright spot of success among the depressing entertainment losses of the pandemic.

(Featured image by PIRO4D via Pixabay)

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