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 stock market crash is likely to hit FTSE 250 shares harder than their FTSE 100 counterparts just because they’re smaller. But lower trading volumes usually make for bigger moves – up or down.

When I asked ChatGPT which UK shares might be most at risk if share prices fall suddenly, it identified Hollywood Bowl (LSE:BOWL) as a candidate. I get the reasoning, but I’m not convinced.

Danger signals

There are definitely risks with the business that could put the stock in danger in a crash. One is it’s heavily exposed to UK consumer spending and that’s been under pressure from all sides recently. 

Unemployment’s up, job vacancies are down, and wage growth’s slowing. On top of that, inflation‘s still above the Bank of England’s target rate and continuing to weigh on household budgets. 

All of those are potential concerns for Hollywood Bowl investors. The company depends on people having disposable income and the macroeconomic signs are that they have less of it. 

If a UK recession brings on a stock market crash, the company’s size could well count against it. The firm’s daily trading volume is typically in the region of 600,000-800,000 shares. 

By contrast, Barclays – a FTSE 100 stock with a similar share price – typically sees between 25m and 35m shares changing hands in a day. And that naturally makes the stock less volatile.

Lower trading volumes mean less liquidity, which makes it harder to find a buyer when things get tight. But I think a crash might be an opportunity for investors interested in the stock.

Opportunity knocks

For investors who are prepared however, falling share prices can present unusually good opportunities. And the same goes for businesses when things get tough.

It’s rare that I highlight a company’s balance sheet as a reason to consider buying it. But with no bank debts and £15m in cash, Hollywood Bowl’s an unusual exception. Having excess cash should put the company in a strong position in a recession. When demand falters, businesses with outstanding loans still have to find ways to make interest payments.

This can get them into difficulties with their leases, leading to sites closing – and landlords looking for new tenants. But this can be an opportunity for more conservatively-financed firms.

A shortage of tenants can lead to lower rents. And Hollywood Bowl should find opportunities to open new locations on favourable terms, as well as renegotiating existing leases.

I’m a big fan of cyclical businesses that are able do deals when demand’s weak and prices are low. This can set them up for long-term success and Hollywood Bowl looks interesting.

Investment strategy

The cyclical nature of Hollywood Bowl’s business makes it vulnerable to a recession. And if this brings a stock market crash, I think the share price could fall more than most. In that sense, I agree with ChatGPT. But I also think the firm’s balance sheet means it should be in a strong position to take advantage of any broader weakness in the industry. 

I’m looking to take a similar approach with the stock. I’m not sure now’s the time, but I’m keeping an eye on it in case something dramatic happens.