Reddit Traders Can’t Keep AMC Entertainment Afloat Forever

I think we can all agree that movie-theater chain AMC Entertainment (NYSE:AMC) didn’t have its best year in 2020. The onset of the novel coronavirus scared people away from theaters, and scared investors away from AMC stock.

People wearing masks walking past an AMC theater.
Source: rblfmr/Shutterstock.com

During the second half of the year, however, some folks took long positions as a “recovery trade.” That didn’t work out so great, with the stock price ending the year not far from its March 2020 low point.

Then came 2021 and what could aptly be described as market insanity. A growing, grassroots army of traders on the Reddit social media platform were on the hunt for short-squeeze targets, and AMC stock was one of them.

And apparently, in April 2021 some social media traders and commentators are still attempting to move stock prices. They may succeed in the short term, but informed investors shouldn’t ignore the fundamentals.

A Closer Look at AMC Stock

We could identify not just one, but multiple “bottoms” in AMC stock. After trading at much higher prices, the stock fell to $2 and change on several occasions:

  • April 13, 2020
  • Nov. 2, 2020
  • Jan. 5, 2021

Clearly, this is a stock that can fly high but has demonstrated difficulty in maintaining its rallies.

What took place in late January of 2021 wasn’t your run-of-the-mill rally, however.

Probably due to a short squeeze prompted by Reddit users, along with the media attention this generated, AMC stock catapulted to a stunning 52-week high of $20.36 on Jan. 27.

Just a couple of weeks later, the stock had declined to $5 and change. This just goes to show that if your timing isn’t ideal, it’s probably not a great strategy to try to capture gains from frenzied Reddit activity.

Admittedly, there’s been some recovery in the AMC stock price. As of April 23, the shares were trading at $10.16.

Words of Wisdom

At this point, I’d like to bring up an old but still relevant quote from renowned value investor Benjamin Graham.

It goes like this: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

In crazy times like this, I believe it’s important to keep these words of wisdom in mind. Basically, Graham (assuming I’m interpreting his quote correctly) is reminding investors that sentiment drives asset prices in the short run.

The other part of that thought is that eventually, the company’s financials and fundamentals will actually matter. If a company is consistently profitable, the company’s stock price should be higher in the long term.

I hate to be the bearer of bad news, but AMC doesn’t appear to meet that standard. When I checked on April 23, the company’s trailing 12-month earnings per share was -$39.15.

That’s quite discouraging, especially for a $10 stock. Negative per-share earnings isn’t always a deal breaker for me, but -$39.15 may be too deep a hole to climb out of.

A Day to Celebrate?

It’s a good thing that I’m constantly reading InvestorPlace articles. Otherwise, I might have missed William White’s excellent primer on the social media hashtag #AMCDAY.

Apparently, this is the social media trading crowd’s version of a holiday. However, this isn’t the type of holiday that involves balloons and cakes.

Instead, the purpose of #AMCDAY was for investors to buy up shares of the stock and thereby send it higher. This event took place on April 22.

It didn’t take long for me to find evidence of the holiday spirit surrounding this pump party on Reddit. Here’s a delightful post:

“Tomorrow is #AMCDay here’s a few things to do: Every Tweet or Comment use #AMCDay Tell Family,Friends and Colleagues about #AMCDay BUY and HOLD all the #AMC you can on #AMCDay Book yourself a Day at the #AMC movies on #AMCDay BE AN APE on #AMCDay”

There was, indeed, a quick AMC stock price spike on April 22.

In case you haven’t detected my skeptical tone, though, I don’t advise a “BUY and HOLD” strategy based on hashtags – or on the short-term, Reddit-fueled voting machine in general.

The Bottom Line

For the long term, an “earnings first” policy is what I would recommend to informed investors amid a frenetic market environment.

And when the party goers come calling, the distant but urgent voice of Ben Graham will, hopefully, snap us back to reality.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/reddit-traders-cant-keep-amc-stock-afloat-forever/.

©2021 InvestorPlace Media, LLC