AMC Entertainment (NYSE:AMC) has been a very volatile name over the past few months. Hammered by the novel coronavirus, AMC stock found itself as a favorite among short sellers.
However, the shorts couldn’t keep it down forever. Perhaps they could have, as the company was in a bit of a financial pickle. But because of the Reddit traders over at Wall Street Bets, AMC stock and a handful of others came roaring back to life.
AMC was one of the main stocks in that short squeeze and it couldn’t have come at a better time. Management was quick — and smart — to act quickly. As shares rocketed higher, the company orchestrated a cash-raising effort.
From mid-December to late January, the company raised more than $900 million. According to CEO Adam Aron, “This means that any talk of an imminent bankruptcy for AMC is completely off the table.”
In order to thrive, a company must survive and AMC addressed that issue early in the year, dealing a huge blow to short-sellers’ bear case.
Why We’re Avoiding AMC Stock
Despite the company staving off bankruptcy, we’re going to avoid this name. That decision may be surprising to some readers.
AMC is a recovery play, as the country goes through a rapid (and impressive) vaccination drive. As theaters open up across the country, AMC will be set for a massive recovery in its business.
While this much is true, it’s very difficult to value this company. How do we assign a valuation to a stock that was on the brink of bankruptcy? How do we account for coronavirus variants that may or may not be covered under the current Covid-19 vaccination?
There are many unknowns with this specific situation, but the biggest reason is also the simplest: AMC stock lacks secular growth.
Unlike the cloud, digital advertising, edge computing, artificial intelligence, big data and other major secular themes, people going to the movies is not exactly a secular growth theme.
Sales are expected to double this year to $2.5 billion and nearly double again in 2022 to $4.78 billion. However, AMC is still forecast to generate a loss in both years — not to mention the losses it took in 2020.
Not that it was the company’s fault, but the circumstances of that year ravaged its balance sheet to the point where its survival was in question. Remember, when we invest in companies, it’s about what it will do in the future. However, it’s also about the financial shape that it’s in.
While AMC stock may enjoy a multi-year recovery, it’s doing so from a position of weakness, not strength.
Many companies we follow — be it in semiconductors, streaming video and elsewhere — saw a huge acceleration in growth due to Covid-19. However, that wasn’t a one-time bump and now these companies will see a reduction in revenue this year.
Instead, these companies are posting robust growth after those results as well. Those are the names we want to be buying — not AMC stock.
Bottom Line on AMC Entertainment
Click to Enlarge
When we look at the chart, AMC stock is tightening into a wedge pattern. That’s evident by its series of higher lows and lower highs. The stock also continues to ride its 10-week moving average higher.
Further, AMC is maintaining above prior resistance near $7.50, while struggling to reclaim its 200-week moving average. By most accounts, this isn’t a screamingly bullish setup, but it’s not bearish. Given the situation, the stock is actually trading reasonably well.
On the upside, look for a move above $10 and the 200-week moving average. That opens the door to $14 and potentially $15-plus. On the downside, be cautious on a move below the 10-week moving average. Below puts $7.50 and the 21-week moving average in play.
Although AMC stock may be a decent trading vehicle, it completely lacks the fundamental drivers that we require in our holdings. The technicals are a complement to a good situation — not the main catalyst we look at for being long or short.
For now, continue to avoid AMC, even though the headlines, Reddit and hype will have you believing it may be a good stock to own.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.
