AMC Entertainment (NYSE:AMC) was trading at around $2 per share in early January 2021. However, AMC stock soon spiked to as high as $20.36 in less than one month.
Today, it trades at $11.49. The stock experienced an unsustainable rally. Now, the recent decline poses a question: should you buy the dip or is this pick of the Reddit stocks going to crash even further? Is now the time to buy a stake in AMC?
Back in mid-March 2021, I wrote another article about AMC stock, mentioning that it “rebounded sharply thanks to emotion-driven sentiment and Reddit support.” Some of the key points in that article were the stock’s weak performance and poor outlook despite the recent popularity.
Has my investment thesis changed on AMC stock now? Well, in the absence of any fundamental catalyst, the answer is an easy no. The stock is too expensive and should be avoided. But there is now another important factor weighing on my opinion here.
CEO Says the Stock Is ‘Under Attack’
On Apr. 15, Yahoo! Finance reported that the CEO of AMC Entertainment, Adam Aron, “said the movie-theater chain [was] once again ‘under attack’ from short-sellers after skirting bankruptcy during the Covid-19 pandemic.” This happened in an interview with Trey Collins.
Now, when I read this I thought it was a joke. But reading further, I came up with another important conclusion — a conclusion about why you should avoid AMC.
In the interview, “CEO Adam Aron […] touched on a proposal to raise new equity and praised the meme investors who bid the stock up to more than $20 a share in January.”
Consider this for a moment. As an investor, the most important question to ask yourself is why buy or sell a stock. Does it have great prospects and good fundamentals? Or, inversely, is it overvalued with poor fundamentals?
Of course, the main reason for buying a stock is to make money and increase your capital invested. Get compensated for the risk and the time value of money. All of these things are for the investor to consider.
But what about management? What are the core values of running a successful business? The number one priority for management of a company is maximizing shareholder value. Just that. The CEO, CFO and other executives of any publicly traded firm must run their business to create profitability and value, add capital gains and widen the economic moat.
Executives must make tough decisions and weigh in market conditions and unforeseen events, such as the novel coronavirus. They must also get results in terms of financial performance. These results must be the outcome of their active leadership.
Given Aron’s comments, I’m not sure you’re getting that with AMC stock.
Is Management Relying on Others to Boost the Share Price?
What do I mean about active leadership?
Active company leadership cuts costs, increases production and profitability, sets priorities, adds incremental economic value and makes a company so valuable that others may want to acquire it at a significant premium.
If the stock of Company A is priced at $10 per share and Company B makes an offer of, let’s say, $30 per share to acquire Company A, this is a great deal for that company’s shareholders. It’s simple.
In this scenario, Company B evaluated that the management of Company A had done something remarkable. Their active leadership had added tons of value. But the key phrase here is active leadership. After all, that’s why management gets paid.
So, when AMC’s CEO praised meme investors for bidding the stock up to more than $20 in January, this was a big red flag for me as a financial analyst. This is not active leadership. To me, it actually nullifies the CEO’s role completely. In effect, it says we could not achieve this ourselves.
I did not read any press release from AMC when the stock surged for no apparent reason in January. But when this excitement and speculation frenzy cooled down, was this the fault of short sellers?
And what about the actual value of the stock? The company is financially weak, with a possibility of bankruptcy in the coming years. According to the stock’s most recent Altman Z-score of -1.86 on Gurufocus, this name is in distress.
And now that logic has returned to the stock market, investors and not just traders are evaluating the true fundamentals of AMC stock. The fact that management is relying on outside factors to boost the share price at all is not promising.
The management behind any public company can be a great, value-adding factor for a stock. For me, though, CEO Adam Aron’s recent statement is just another reason to stay away.
The Verdict
AMC has poor fundamentals and is financially weak while sporting a very expensive stock. What’s more, it counts on speculators to raise its price and blames short sellers for its own decline.
There is a mix of arguments to stay away from AMC stock. Based on pure financial analysis, it’s a no. Add in Aron’s comment, and it’s a no without any hesitation.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.
