I am not a fan of chasing AMC Entertainment (NYSE:AMC) stock. This is even if it means that I could miss out on upside. The logic for my apprehension is easy to explain.
Its business situation is nowhere near what it had been before the coronavirus pandemic. Therefore, the stock shouldn’t have rallied 65% above that level.
I can understand jumping ahead to flat levels from February 2020. Going above that is overkill and likely to disappoint. It is also extremely important to realize that you shouldn’t not short it outright. I am not a hater of AMC stock, just merely trying to avoid obvious potential mistakes.
We just had the Oscars last weekend, so movies are in the forefront of people’s minds again. Yet AMC is down today after the Monday pop.
Let this be a reminder that shenanigans, not actual fundamentals are what’s driving the action in AMC stock. If the goal is to find investment opportunities, then the action in AMC is anything but that. Yes, it trades very well, but that’s the gambling side for a new and special breed of traders.
This is even different than what used to be trading the normal price action. I am very familiar with that aspect and can totally navigate it intraday.
What is happening with Reddit stocks is pure manipulation by internet “gangs.” So far, the Securities and Exchange Commission (SEC) has let it happen. But, eventually, it will need to act. Otherwise it would be green-lighting profits from stock manipulation.
The AMC Stock Situation Is Not Back to Normal Yet
With that ugly aspect out of the way, let’s dive into the investment details.
First, we address the macroeconomic situation for AMC stock. Perhaps the most important part of it is the vaccination process in the U.S. That’s going very well and scores marks for the stock. My problem with that is the bulls already took out the ledge from February 2020 by 65%. I understand the anticipation of a recovery, but this “recovery” eclipsed the level from before Covid-19 started. Therefore, going back to “normal” in this case means a 35% drop from current prices.
Fans of the stock have a hard time separating fact from opinion. AMC’s income statement was iffy at best even before 2020. Its net income ranged from -$487 million to +$110 million through 2019. For the last 12 months it is a -$4.5 billion disaster. These are facts, not my opinions.
Another fact is that the reopening process for all crowd companies will remain slow. There are capacity restrictions everywhere. To boot, theaters were already struggling to fill the rooms, so it’s going to be a slog.
Because they were in survival mode, AMC’s management and many like it had to borrow. As such, the company’s debt-to-asset ratio exploded higher. That’s not a good thing because it somewhat ties its hands going forward. When a company has a lot of debt, it is not free to do all it wants. Banks have a big say and it’s rare what’s best for growth.
In addition, there isn’t much they can do if they have another crisis. What 2020 taught us is to expect the unexpected.
There Are Clear Battle Lines Between Bulls and Bears
Technically, AMC stock has support near $10 per share and sellers are lurking $3 above that. Meanwhile, it’s a contentious range that makes for interesting battles.
Soon enough, management will have a chance to tell us how rosy their future will be. Hopefully it will live up to the expectations of the stock owners. Judging by the stock price, they have set a high bar. The reaction to earnings will be more about hope rather than dollars and cents. It doesn’t have to make sense because sentiment will be the driver.
With all of this in mind, I’d like to reiterate the most important part of my message: do not consider shorting AMC stock. The 800% spike in January could happen at any time, or never again. My goal moving forward is to never find myself like those who bought it at $20. That was such an easy trap to avoid.
Never chase a runaway stock, especially one where there are hundreds of people rigging the game.
Wall Street folks have always controlled the rules, so they have had an advantage. The Reddit folks are sticking it to them by ganging up against them. In the process, they are making a mockery of the whole process and potentially ruining it.
I hope that the authorities reign both sides in so we can at least pretend it’s not a rigged market.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.