With stocks selling off over the past week or so, a number of very interesting opportunities have begun to pop up in North American equities markets. With valuations coming down in the near-term, the question of whether investors should buy the short-term volatility and get in now, or wait for a deeper dip, is a difficult one to answer.
While Mr. Market may indeed be providing investors with a number of excellent value opportunities, a significant number of value traps (stocks which appear to have value, but have declined on a fundamental basis) remain. One such stock I would put in this category is Cineplex Inc. (TSX:CGX).
On the surface, Cineplex is a company which appears very attractive to investors looking for yield (currently shares of Cineplex carry a dividend yield of approximately 5%), as well as capital appreciation opportunity (given the company's more than 36% drop over the past 52 weeks). A beaten up stock will typically provide a yield which is much higher than historical averages, and in the case of Cineplex this is true, however investors need to take into consideration two key factors.
First, the ability of Cineplex to continue paying out a 5% yield may be in question long-term, given the fact the company has continued to pay out more than 100% of earnings to shareholders for quite some time.
At some point, investors may demand that cash flow be used to pay down debt (which has increased substantially) or reinvest in the company's core business to improve ROE (which has remained low).
Second, the fact that Cineplex's cash flow generation has continued to decline for some time should continue to impact discounted FCF models moving forward, making this company's valuation multiple unsustainable long-term.
Invest wisely, my friends.
