After Reddit’s subgroup, r/WallStreetBets, sent AMC Entertainment (NYSE:AMC) flying, the shares have proven to have staying power. AMC stock has hovered near $60 for nearly all of June, and the stock is not too far from its 52-week high.
AMC has a history of selling shares and raising debt because its movie business loses money. That was the case even before the pandemic greatly lowered attendance at movie theaters.
AMC Stock Could Tumble
Speculators cannot deny that AMC is trading way above the levels justified by its fundamentals. Its movie theater business is still broken. The Covid-19 pandemic led to a dramatic shift away from studios automatically releasing blockbuster movies to theaters before giving them to streaming services.
Instead, some movies are being released to streaming services and theaters simultaneously, while others are being released to streaming services first.
For example, AT&T’s (NYSE:T) WarnerMedia is immediately releasing its hit movies to HBO Max.
A resurgence in movie attendance at AMC’s theatres is still possible. Assuming that vaccinated Americans are protected from the delta variant of the coronavirus, the government will let AMC keep its theatres open, and studios will release long-awaited movies as well as some new flicks to them, driving its attendance upward.
The Short Squeeze
In the near-term, Reddit investors will be able to continue their short-squeeze play on AMC. Nearly 19% of the shares of AMC stock are being sold short. So hedge funds that will lose a great deal of money if they cover their short positions on the shares may wait for awhile before covering.
The funds may decide to bet that many retail investors, in order to take profits, will sell their shares.. As more retail investors sell the stock, hedge funds may cover their short positions at lower prices.
AMC’s stock could fall very quickly. In the last month, a high number of Redditors have sold many shares of other stocks with large percentages of their floats sold short.
For now, the purchases of AMC stock have stayed steady, indicating that its shareholders do not have to take their profits just yet.
A Hedge Fund Shuts Down
News that London-based White Square Capital is closing after shorting GameStop (NYSE:GME) will further encourage AMC’s shareholders.
Buying the stocks with the most short interest and holding them through thick and thin could again work for many investors. Those speculators, after all, just need to hold the stocks long enough for the bearish hedge funds to close down.
Those who are bullish on AMC are betting that the demand for the shares will continue to be strong. Plus, since the shares were recently added to the Russell 2000 Index, exchange-traded funds and passive index funds must hold the name going forward.
Value investors who do not want to buy a meme stock could consider purchasing Cinemark Holdings (NYSE:CNK) instead. The market capitalization of the latter theater chain is just 10% that of AMC. And Cinemark, like AMC, will also benefit from some blockbuster movie releases.
Within the movie sector, Disney (NYSE:DIS) stock is another alternative. Because the company’s theme parks have reopened, its revenue should climb in the quarters ahead. Also, its Disney+ streaming service has 103.6 million subscribers worldwide. Investors who are looking for exposure to streaming services and theme parks should buy and hold DIS stock.
The Bottom Line
AMC stock enjoyed a historical rally. Coordinated buying of the shares by the Reddit community, the efforts to bankrupt short-selling hedge funds, and rampant speculation led to the incredible rally.
However, the owners of AMC stock who have made big paper profits on the trade should consider selling the shares before they fall.
On the date of publication, Chris Lau 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.