Groups of traders on Reddit and other social media platforms have sent shares of so-called meme stocks soaring in 2021. AMC Entertainment (NYSE:AMC) stock has been one of their highest-profile targets.
The trading action and wacky online behavior surrounding AMC stock is reminiscent of what I saw trading penny stocks back in the day. To AMC management’s credit, they have played the pump-and-dump better than any other meme stock has. They have even warned investors explicitly about the potential consequences of investing in the stock.
The AMC Stock Pump
I want to make one clear distinction between AMC stock and the penny stocks I used to trade back in 2008 and 2009. Most of those penny stocks represented businesses that were virtually nonexistent. I suspect many of them were just doing whatever they needed to do to operate at a bare minimum to avoid being legal frauds. Many of them were probably doing even less.
Anyone who has gone to a movie theater knows AMC runs an actual business. AMC is also not the one doing the pumping. The online AMC ape army is the one pumping up the stock.
When I was trading penny stocks back in 2008 and 2009, social media wasn’t nearly as prevalent as it is today. Back then, these clans of online stock traders used the InvestorsHub message boards to pump their stocks.
Two things are almost universal among online penny stock pumpers. The first thing is irrational exuberance. Rather than sitting down and doing the work to come up with a reasonable stock price target, they would make laughable claims about 1,000% upside. It was common to see posters making claims that a penny stock was going “to the moon” without any real justification for that claim.
The other almost universal characteristic of penny stock pumpers was a preoccupation with short sellers. When a stock price was stagnant or dropped, short sellers were always to blame. When it went higher, it was always a victory over the short sellers. This is the exact same behavior I’ve witnessed with AMC stock on social media this year.
The AMC Dump
I give a lot of credit to AMC management for not participating in the pump. Lots of penny stocks issue constant press releases encouraging the irrational exuberance. They make bold claims about future business, partnerships, restructuring or pivots to the latest trend.
Instead, AMC has done its part to take advantage of the pump by dumping hundreds of millions of shares into the market. At the end of 2019, AMC had 103.9 million shares outstanding. By the end of 2020, it had 224.3 million shares outstanding. Today, it has 501.8 million shares outstanding.
In other words, while AMC’s year to date growth has gone higher than 3,000%, today settling at a still staggering nearly 2,000%, AMC management has been printing and selling shares feverishly in an attempt to stay solvent. In fact, one share of AMC now represents roughly 20% of the ownership it represented at the beginning of 2020.
I don’t blame AMC for the dumping. In fact, I praise it. AMC was dead in the water at the beginning of 2021. The company had $5.4 billion in debt as of the end of 2020 and generated a net loss of $4.5 billion last year. In January, AMC management acknowledged its online supporters by saying bankruptcy was “off the table” following the company’s $900 million share dump. The implication, of course, was that bankruptcy was very much on the table prior to the dump.
How To Play It
Only time will tell whether AMC has done enough dumping to keep the company afloat. After all, AMC’s struggling business wasn’t profitable even prior to the pandemic. And streaming services pose an existential threat to the movie theater model.
But to AMC’s credit, the company has been very clear with investors about what’s going on.
Following another 11.5-million share dump in May, AMC said huge gains in its stock price are “unrelated to our underlying business.”
“Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment,” AMC said in the filing.
One final similarity between AMC apes and the penny stock pumpers on InvestorsHub is how angry they get when you present an alternative viewpoint. So rather than give my personal opinion on AMC stock, I’ll use the same language as AMC management. If you invest in AMC, be prepared to lose all or a substantial portion of your money.
On the date of publication, Wayne Duggan 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.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.