Cinemark's (CNK) Cinematic Comeback: Contrarians Take Note

Once representing one of the unquestioned powerhouses in the broader entertainment sphere, Cinemark (CNK) has suffered two significant headwinds, first in the form of rising competition from content streaming platforms and later the COVID-19 crisis. Still, the pandemic itself may help restore some of what Cinemark lost, thus making CNK stock an intriguing proposition for contrarians.

Technically, Cinemark’s strength is difficult to ignore. Since the start of the year, CNK stock gained just over 115%. Also, following some flat trading since April, the cineplex operator appears to have found second wind. In the trailing five sessions, CNK swung up over 7%. In the past month, it returned stakeholders more than 14%.

What’s particularly conspicuous is that these performance stats handily beat the benchmark S&P 500 index, which lost 2.28% and 2.16%, respectively, during the aforementioned time periods. Unsurprisingly, the Barchart Technical Opinion Indicator pegs CNK stock a 72% strong buy, citing a positive backdrop for the intermediate and long term.

Bolstering the technical narrative is the financial performance. Last month, Cinemark disclosed its results for the second quarter, reporting a profit of $119.1 million. This translated to net income of 80 cents per share, which beat Wall Street’s expectation calling for earnings of 54 cents per share. In addition, the company rang up sales of $942.3 million, also surpassing analysts’ consensus forecast of $880.3 million.

Still, can CNK stock climb a wall of worry, particularly amid troubling consumer economic headwinds? Surprisingly, options traders appear to say yes.

CNK Stock Gets a Nod of Approval from Options Traders

After the ringing of the closing bell on Sept. 25, CNK stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 14,694 contracts against an open interest reading of 94,659 contracts. Compared to the trailing one-month average metric, the delta for the Monday session volume came out to 581.86%.

Transactionally, call volume hit 7,530 contracts while put volume landed at 7,164 contracts. On paper, this pairing yielded a put/call volume ratio of 0.95, which seemingly slightly favors the bulls. Still, just reading the face-value implications of the ratio can be deceptive as traders can deploy multiple transactions as part of a complex or multi-legged strategy.

To better decipher the inner workings of the derivatives market for CNK stock, Fintel’s options flow screener – which exclusively focuses on big block trades likely made by institutions – offers further insights.

Notably, the most recent transaction made by a major trader was the purchase of 1,036 contracts of the Oct 20 ’23 19.00 Call option. Interestingly, this particular derivative may see heightened activity. On Sept. 21, a trading entity – possibly an institutional investor – sold (or wrote) 1,023 contracts of this $19 call option, collecting a premium of $25,600.

However, since that time, the call’s implied volatility (IV) rose to 49.54% from 44.65%. Moreover, the delta increased to 0.3713 from 0.3096. Put another way, thanks to the robust performance of CNK stock in the open market, there’s a good chance this contract will end up in the money.

Given the anonymous nature of the options chain, it’s impossible to know who’s doing what unless otherwise disclosed. One possibility between the countervailing actions of the $19 call is that it’s the same investor hedging an initially bearish wager that may go bad soon.

Adding to this sentiment, there were four other major trades placed on Monday, all of them bought calls at varying strike prices. Moreover, three of the four calls featured volume of 609 contracts, suggesting – though not absolutely claiming – that they stemmed from the same trader.

Taken as a whole, options traders appear optimistic about CNK stock following significant bouts of skepticism.

A Fundamentally Justified Idea

Look around and you don’t have to wait too long to see evidence of a hurting consumer economy. As Barchart contributor Amy Legate-Wolfe pointed out, Americans collectively carry credit card debt of $1.03 trillion. That figure might worsen as stubbornly high inflation continues to take its toll.

Also, major companies have continued to conduct layoffs this year. Combine this crisis with escalating costs across the board and consumers simply don’t have much discretionary funds available. Still, entertainment represents a key component of mental health. And going to the box office offers a social experience that you really can’t get sitting at home streaming a movie.

Plus, as other forms of entertainment – whether sporting competitions, live concerts or other high-profile events – become costlier, the cineplex looks mighty appealing. It appears that the smart money has figured that out, meaning CNK stock is worth consideration.

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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. For more information please view the Barchart Disclosure Policy here.