- AMC Entertainment (AMC) stock has climbed back above $30 per share.
- Chalk the rally up to a resurgence of the buzz about AMC and other meme stocks on Reddit.
- If you own AMC, sell it because its new investment isn’t thrilling, and the shares remain overvalued.
After AMC soared 66% in the past week, it may seem like the story is far from over for AMC Entertainment (NYSE:AMC). Yet as with the previous times in recent months that AMC stock has spiked, expect its recent move back above $30 per share to be short-lived.
The rally by AMC and the stock market have inspired many meme-stock investors to dive back into AMC. But these new developments do not do much to bolster the stock’s outlook, and a recent investment by the company is hardly the “big deal” that some seem to believe it is.
Meanwhile, the resurgence in the bullishness towards AMC stock among investors may not last. Some of the previous uncertainty about the Fed’s rate hikes may be easing. Still, other worries, including the possibility of a recession, may cause stocks to ultimately fall. Such a decline would result in meme plays like AMC falling more quickly than the overall market.
That’s particularly true because AMC stock continues to trade at a high premium to its underlying value. Don’t get tricked by its latest move higher. In time, the latest surge will likely prove to be little more than a “dead cat bounce.”
Why AMC Stock Has Bounced Back
As I mentioned above, multiple factors are behind AMC’s jump from around $16 to more than $20 per share in recent days. First is the factor that has sparked the most headlines: the company announced that it plans to buy 22% of Hycroft Mining Holding Corporation (NASDAQ:HYMC).
Secondly, the stock market has performed well since mid-March. The market’s resurgence kicked off following Federal Reserve Chairman Jerome Powell’s latest remarks on the central bank’s rate-hike plans. Clearing up some of the uncertainty, the chairman’s statements have helped to lessen some of investors’ pessimism towards the market. Unfortunately, both of these factors will only temporarily impact the price of AMC stock.
But there are important reasons to believe that the market has not yet bottomed. Specifically, we know for sure that further rate hikes are coming, and that the chances of a recession have risen.
If a recession is indeed in the cards, the relief rally will fade, and stocks will move lower. This will likely reverse AMC’s recent gains and quite possibly send it even lower, as a recession isn’t just bad for the stock, but for the company’s business as well.
AMC’s Business Continues to Flounder, and the Hycroft Deal Won’t Save the Day
A recession would undermine AMC stock in two ways. First, if an economic downturn does occur, the stock market will sink . And as we saw in the first 2.5 months of the year, when the stock market retreats, meme plays like AMC underperform.
Additionally, a recession will, of course, mean that the American economy is contracting. During the current economic expansion, robust consumer spending has helped AMC’s business partially recover from the pandemic. Yet with inflation at 40-year highs, consumer spending is already starting to slip, and an economic downturn would cause household spending to decline further.
Even worse for AMC, streaming’s popularity could increase further and take more market share from theaters, as more movie fans opt to save money by watching new flicks at home. The resulting impact on AMC’s performance will outweigh the limited gains that it will generate from its Hycroft investment.
Speaking of Hycroft, as another InvestorPlace columnist, Dana Blankenhorn, recently put it, all that glitters is not gold when it comes to this deal. While Hycroft, a junior miner, is sitting on a gold mine (both literally and figuratively), there’s a reason why HYMC stock is a small-cap penny stock.
It’s going to take far more cash than AMC’s investment or the proceeds from an at-the-market secondary offering for Hycroft to extract the tens of billions of dollars of hard-to-reach gold and silver that are supposed to be in its northern Nevada mine. A payoff from AMC’s investment in the miner is years away at best and will never arrive at worst.
The Takeaway From AMC’s Recent Rally
As I argued back in February, the fair value of AMC is less than $10. And that’s assuming that it continues to deliver results in -line with its Q4 earnings. An economic downturn will push the shares closer to their fair value and lower that fair value as belt-tightening among consumers will stymie its post-virus recovery.
So what should investors do with AMC stock after its latest surge? Those who own the shares should exploit the stock’s rally by selling them. And those who don’t own a position in the shares should stay away from them.
On the date of publication, Thomas Niel 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.