The 5 Worst Causes to Purchase AMC Leisure Inventory

After a pandemic in 2020, the most important development of the current year was retail investors reaffirming their presence on Wall Street.

For nearly three months, retail investors have been joining forces in Reddit’s WallStreetBets chat room to buy stocks and out-of-the-money call options in companies with high short interest. The goal for these mostly young and / or inexperienced investors is to get a short press – ie, an event where pessimists who want to see the stock price of a stock decline are pushed out of their positions by rapidly rising stock prices.

Private investors have managed to briefly squeeze a handful of securities. Though video game and accessories retailer GameStop Maybe it’s the most famous, it’s a cinema chain AMC Entertainment ((NYSE: AMC) This has become, so to speak, the battlefield inventory between Reddit dealers and Wall Street.

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Unfortunately, many of the reasons retail investors choose AMC are terrible for lack of a better word. If your buying work is based on one or more of the following five ideas, you could end up in the end Kiss goodbye a significant part of your investment.

1. “AMC’s share price is too low”

One of the worst reasons to buy in AMC is to think that the $ 9.36 stock price looks cheap compared to the $ 20 that were on offer back in September 2018. The problem with this buy thesis is that the stock price is meaningless without considering the number of shares outstanding.

For example, AMC ended 2018 with 135.5 million shares outstanding and a share price of $ 12.28. After doing the math, it has a market capitalization of $ 1.66 billion. Last weekend, AMC had 450.2 million shares outstanding. Based on the share price of $ 9.36, its market capitalization is $ 4.2 billion.

To put this into context, AMC stock is down 67% over the past five years, but market capitalization is up 54%. AMC’s market capitalization over the past two months is higher than ever since it became a publicly traded company in December 2013. The thesis that AMC is cheap because of its stock price doesn’t hold water.

A rocket made of dollar bills that was launched into the stratosphere.

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2. “A short press is imminent”

Arguably the most common buying thesis I hear for AMC among Reddit investors is that it is prepared for a quick press. The unfortunate part is the momentum that contributed to a brief press in late January and early February no longer exists.

The correct recipe is required for a quick print. First, there must be a high level of short interest on a company’s float (i.e., its tradable shares). In the case of AMC, 49.3 million shares were held in mid-March, compared to a float of 404 million shares. This corresponds to a short interest rate of 12%. That’s definitely higher than the average publicly traded stock, but it’s not off the charts. In fact, the percentage of float held for AMC has dropped from nearly 40% to just 12% over the past four months.

In addition, the company’s short ratio (also known as “days to cover”) has fallen significantly. In October, it took short sellers over three days to exit their positions. AMC’s high daily trading volume would enable pessimists today to cover within a few hours.

A couple eating popcorn while watching a movie in a movie theater.

Image source: Getty Images.

3. “99% of the theaters are open again”

Retail investors are also excited about AMC’s reopening of the cinemas. As of March 26, the company predicted so 99% of the theaters would be open for business. While I freely admit that open theaters are better than fully closed theaters in every way, the purchase thesis lacks some important points.

First of all, it is not as if the AMC theaters will soon be at full capacity. With the new variants of COVID-19 floating around in the US, we are in the race to vaccinate as many people as possible. If too few people are vaccinated, these variants can minimize the effectiveness of coronavirus vaccines and greatly improve the prospect of herd immunity.

Additionally, AMC’s film exclusivity has had a pretty big hit during the pandemic. AT & T.WarnerMedia has decided to release all of its news movies in 2021 on HBO Max on the same day they hit theaters. Walt Disney is taking a similar step with a handful of films on its Disney + streaming service. In the future, AMC could consider significantly reduced exclusivity, which it will hinder his turnaround efforts.

According to Wall Street, AMC is unlikely to reach its pre-pandemic annual sales until 2024.

A magnifying glass over a company's balance sheet.

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4. “I like going to the cinema”

Investing Peter Lynch has always been a huge fan of buying what you know. But Lynch also realizes that a great investment is much more than just liking or using a product. From what I’ve seen on social media, some retail investors enjoy going to the movies but are allergic to digging them up Income statement and balance sheet of AMC.

On an accounting basis, AMC found in its fourth quarter operating results that more than $ 1 billion in cash was available. This is the case after issuing nearly 165 million shares and borrowing over $ 400 million between mid-December and mid-January. However, 2020 ended with $ 5.7 billion in debt, and some of the debt issued since March 2020 has interest rates between 10% and a floating rate of 17%. Servicing these debts will be very challenging and will minimize AMC’s opportunities for growth initiatives.

In terms of its income statement, AMC reported negative free cash flow of $ 1.3 billion last year. That number should improve as the company’s theaters are now somewhat open. However, profitability is still a long way off. For the next 24 months, AMC doesn’t seem to have enough money to cover his losses.

Investors are welcome to like a company – but investing in it without knowing the basic details is a huge mistake.

A businessman holding a stack of cash behind his back with crossed fingers.

Image source: Getty Images.

5. “If we buy and hold, the hedgies lose”

Finally, there’s the idea that retail investors who buy up the float and hold onto AMC stock will stick it to the “hedgies” – a term given to Wall Street hedge funds and institutional investors. This is also a misguided buying thesis.

Although the percentage of AMC shares owned by institutional investors has more than halved since October – this is likely a function of tripling the company’s outstanding number of shares – data from YCharts shows that institutions still hold 32% of all stocks. That is an important part.

Additionally, most of the trading volume these days comes from high frequency trading programs and not from retail investors or even hedge funds. There will never be a case where retail investors own such a significant portion of the float that they can block downward movement in AMC stocks.

As with any publicly traded company, the operating results, not the emotions, determine the long-term price development of AMC. With the company facing clear cash problems for the next two years, it will likely be forced to once again Dilute the daylight of its shareholders to stay afloat.

Overall, the Reddit buying work for AMC makes little to no sense.

This article represents the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.