I asked ChatGPT which UK shares are most at risk in a stock market crash. It named this FTSE 250 firm

It feels unfair {that a} inventory market crash is prone to hit FTSE 250 shares more durable than their FTSE 100 counterparts simply because they’re smaller. However decrease buying and selling volumes often make for larger strikes – up or down.

After I requested ChatGPT which UK shares is likely to be most in danger if share costs fall immediately, it recognized Hollywood Bowl (LSE:BOWL) as a candidate. I get the reasoning, however I’m not satisfied.

Hazard alerts

There are undoubtedly dangers with the enterprise that might put the inventory at risk in a crash. One is it’s closely uncovered to UK client spending and that’s been underneath strain from all sides not too long ago. 

Unemployment’s up, job vacancies are down, and wage development’s slowing. On high of that, inflation‘s nonetheless above the Financial institution of England’s goal fee and persevering with to weigh on family budgets. 

All of these are potential considerations for Hollywood Bowl buyers. The corporate depends upon folks having disposable earnings and the macroeconomic indicators are that they’ve much less of it. 

If a UK recession brings on a inventory market crash, the corporate’s dimension might nicely rely in opposition to it. The agency’s day by day buying and selling quantity is usually within the area of 600,000-800,000 shares. 

Against this, Barclays – a FTSE 100 inventory with an identical share value – usually sees between 25m and 35m shares altering fingers in a day. And that naturally makes the inventory much less risky.

Decrease buying and selling volumes imply much less liquidity, which makes it more durable to discover a purchaser when issues get tight. However I feel a crash is likely to be a chance for buyers within the inventory.

Alternative knocks

For buyers who’re ready nevertheless, falling share costs can current unusually good alternatives. And the identical goes for companies when issues get robust.

It’s uncommon that I spotlight an organization’s stability sheet as a cause to think about shopping for it. However with no financial institution money owed and £15m in money, Hollywood Bowl’s an uncommon exception. Having extra money ought to put the corporate in a powerful place in a recession. When demand falters, companies with excellent loans nonetheless have to seek out methods to make curiosity funds.

This may get them into difficulties with their leases, resulting in websites closing – and landlords on the lookout for new tenants. However this may be a chance for extra conservatively-financed companies.

A scarcity of tenants can result in decrease rents. And Hollywood Bowl ought to discover alternatives to open new places on beneficial phrases, in addition to renegotiating current leases.

I’m a giant fan of cyclical companies which might be in a position do offers when demand’s weak and costs are low. This may set them up for long-term success and Hollywood Bowl seems to be attention-grabbing.

Funding technique

The cyclical nature of Hollywood Bowl’s enterprise makes it weak to a recession. And if this brings a inventory market crash, I feel the share value might fall greater than most. In that sense, I agree with ChatGPT. However I additionally suppose the agency’s stability sheet means it needs to be in a powerful place to benefit from any broader weak spot within the business. 

I’m seeking to take an identical method with the inventory. I’m undecided now’s the time, however I’m keeping track of it in case one thing dramatic occurs.