For some strange reason, Reddit’s WallStreetBets embraced the short-squeeze of AMC Entertainment Holdings (NYSE:AMC). While its business is on the cusp of recovering, its earnings will not get anywhere near a level that justifies its valuation. Its market capitalization, which exceeded that of GameStop (NYSE:GME) at the end of last week, is most puzzling. For that reason, investors need to sell AMC stock before Reddit catches on.
AMC stock faces tremendous selling pressure if buyers start to doubt their bullish bet. Management is not on the shareholder’s side, either. This will enrich executives, raise AMC’s cash levels, but will leave shareholders with investment losses.
AMC Stock Shorts in Pain
AMC Entertainment’s short float of around 23% will hurt bears. The paper loss is only temporary, so long as short-sellers do not buy the stock to cover. Bears only need to embrace the temporary losses. If speculators lock in profits, then the stock will start to drop. Board members are another bearish catalyst for AMC. Last week, five directors sold less than half their AMC shares.
Insiders locked in on $4 million worth of shares. That includes two directors raising over $700,000 and three directors raising over $800,000 each. Bulls who still hold AMC think they know more than those insiders.
That is a foolish position.
When insiders sell, they are signaling that the stock is not worth as much as the market gives it. On June 3, the company filed to sell a whopping 11.5 million shares. The company should get credit for its honesty. In its filing, it said,
“We believe that the recent volatility and our current market prices reflect the market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last.”
Management is taking advantage of the market’s short-squeeze movement. This is a temporary phenomenon that is a repeat of the January to February rally in shares. This time, AMC traded above that peak. This is a once-in-a-lifetime opportunity for AMC to cash in on the stock’s mispricing.
AMC Is Not Worth $31 Billion
At the time of the stock sale filing, AMC traded at a market capitalization of $31 billion. GME stock had half that valuation after the stock’s plunge last week. The difference is that Redditors might bet that GME’s management will put the money to good use.
GameStop sold stock to raise cash and to cut its debt. It will reinvest in the business by pivoting away from brick-and-mortar stores. Digitizing goods, from cryptocurrency to games to digital content are only a few of GameStop’s options.
AMC must rely on studios for creating blockbuster movies. Once released, it needs moviegoers returning to theaters in droves. With the pandemic winding down in the U.S. and summer on the way, that scenario is not likely.
Inflection Point
AMC retrofitted theaters with improved air circulation, physical distancing and other disinfecting measures. This should allay customer fears of contracting Covid-19 at theaters. The company will ultimately rely on people willing to watch movies again.
Throughout the pandemic, streaming services firms thrived. Roku (NASDAQ:ROKU), Disney (NYSE:DIS) and AT&T (NYSE:T) are only a few firms growing subscriptions. That audience may prefer to continue watching movies and television shows through streaming services. Empty AMC theaters would undermine the incredible rally its stock enjoyed in the last few weeks.
Your Takeaway
Valuations are irrelevant in assessing AMC shares. Conversely, Reddit’s WSB created so much momentum that the stock traded as high as $72.62. Some of the millions of investors who bought the stock will start selling to realize profits. The rest will follow as they realize that the company has around $10 billion in debt. To pay it off, the company will sell more shares as fast as it can to lower its daunting leverage.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.