Speculative trading activity in movie theater chain AMC Entertainment Inc. (AMC, Financial) gained steam on Monday morning, pushing shares up by double digits as users on the social media platform Reddit promoted the stock.
Following an 80% rally last week, shares of the Leawood, Kansas-based company were up as much as 25% in early morning trading. Year to date, GuruFocus estimates the stock has climbed nearly 2,500%.
Due to the surge, the GF Value Line indicates the stock is currently significantly overvalued based on its historical ratios, past performance and future earnings projections.
While speculative trading in so-called meme stocks has become a major trend on Wall Street this year, putting pressure on short sellers, there is a risk to it as well for those who are left holding the bag when shares inevitably return to their true valuation. Earlier this year, GameStop Corp. (GME, Financial) soared as retail investors snatched up shares of the struggling gaming retailer. Cybersecurity company BlackBerry Ltd. (BB, Financial) also saw a pop last week.
The bearish strategy of shorting stocks, which involves an investor borrowing shares and then promptly selling them with the expectation that the shares will fall, is also risky. According to S3 Partners, AMC currently has around 18% of its float shares sold short, compared to about 5% for the average U.S. stock. Last week, short sellers betting against AMC suffered $2 billion in losses.
While it might seem appealing to make a quick buck, in an interview with CNBC’s “Squawk Box” on Monday, Interactive Brokers Group Inc. (IBKR, Financial) Chairman Thomas Peterffy warned against shorting these stocks.
“It is extremely tempting to short these stocks, but unless you have huge liquid resources, please try to resist the temptation because these prices can go to unimaginable highs before they settle down to a reasonable valuation, and you may have to cover on the high point,” he said.
On May 6, AMC reported its first-quarter 2021 financial results. Hit hard by lower sales during the Covid-19 pandemic, for the three months ended March 31, it posted an adjusted loss of $1.42 per share, which was an improvement from a loss of $2.22 per share in the prior-year quarter. Revenue, however, declined 84.2% from last year to $148.3 million.
As a result of these headwinds, GuruFocus rated AMC’s financial strength 1 out of 1 0 and its profitability 4 out of 10.
The company is scheduled to report its second-quarter results in August.
In recent months, AMC has launched initiatives to attract consumers back by offering private screenings. It also took advantage of the massive rally last week, selling 20 million shares in two separate deals and generating around $800 million in cash. CEO Adam Aron has indicated he wants to sell up to 25 million more shares.
Despite its best efforts, Peterffy noted the company still has a challenging road ahead in order to justify its valuation, suggesting investors who are interested in buying and holding the stock should steer clear.
“Eventually these stocks will go back to their value, which is roughly single-digit dollars, even if that,” he said. “In the long run, the longs will lose their money. So while you may try to catch a sudden drift upward as a trader, I would recommend against being long on these stocks.”
Of the gurus invested in AMC, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest holding with 0.11% of outstanding shares. John Hussman (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.
