What’s going on with AMC Entertainment (NYSE:AMC) stock? AMC’s cost-to-borrow (CTB) fee has risen to a high of 196.44%, up from 130.66% yesterday and 105.90% a week ago. Meanwhile, the average cost-to-borrow fee for stocks is between 0.3% and 3%, while a high fee is classified as 20% or higher.
The CTB represents the yearly rate short sellers must pay to borrow stock. The fee goes up when short seller demand is high and goes down when demand is low. Furthermore, a rising CTB can also signal a scarcity of available short shares.
On the contrary, a high CTB fee could also be perceived as a positive for shareholders. Let’s get into the details.
AMC Stock Sees Elevated CTB Fee
Imagine paying a 196% annual fee to borrow a stock. That seems excessive and would require a trader to have a high degree of confidence in their trade. As a result, a high CTB lowers the chances of emerging profitable in a transaction. A high or rising fee could also influence short sellers to sell out of their positions by buying the underlying stock in a bid to escape the high fee. This could ultimately increase the chances of a short squeeze.
Based on the latest available data, 125.96 million shares of AMC sold short on Feb. 28 with a value of $899.35 million. That’s equivalent to a short interest as a percentage of float of 24.39%. Generally, a stock carrying a short interest above 10% is considered high, while a short interest above 20% is considered very high.
On top of that, AMC stock is down by over 25% for the month. That is a significant decline in a short window of time, which could influence short sellers to take profits in light of a rising CTB.
April 27 Is a Key Date for AMC
Meanwhile, AMC shareholders have experienced a slew of news in recent weeks.
Last week, it was confirmed that shareholders voted in favor of a 1-for-10 reverse stock split and an increase in authorized shares. The approval of these two proposals opened the door to converting AMC Entertainment Preferred Equity Units (NYSE:APE) into AMC stock. However, the conversion and the proposals will be placed on hold until at least the results for the preliminary injunction motion related to two putative stockholder class actions are revealed on April 27.
On the date of publication, Eddie Pan did not hold (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.