The stock market has rarely been short of enticing turnaround stories, yet few can compare to what AMC Entertainment Holdings Inc. (AMC, Financial) has managed to achieve over the past year. The company’s story is all the more remarkable for what precipitated the apparent turnaround in its fortunes: selling new shares hand over fist.
Short squeeze spectacular
When the coronavirus pandemic brought the world to a halt in the spring of 2020, things could hardly have looked more dire for AMC. Having for years been buffeted by the secular shift in consumer preferences away from live theater-going to streaming media, the months-long global lockdown last year could well have meant the end for the company. The company’s obvious distress proved to be a clarion call for short sellers, many of whom piled into the trade over the course of last year.
Yet, in an ironic turn of fate worthy of one of AMC’s silver screens, the short side became the architect of its own undoing, as trader and analyst Rohail Saleem explained in a July 26 article:
“As we’ve noted repeatedly over the past few months, the shares of AMC Entertainment...have benefitted from a gamma-driven short squeeze. As a refresher, this occurs when dealers are short gamma in an explosive price environment. In order to hedge against adverse price moves, the dealers have to buy or sell an increasing number of shares to protect against losses from upward/downward moves. Of course, the elevated short interest (SI) in AMC shares only acted as the proverbial fuel to this gamma-driven fire, forcing short sellers to cover their losing positions by buying back shares at elevated prices, thus providing a constant source of bids.”
Rumors of AMC’s death were an exaggeration and the overly crowded short trade proved to be fertile ground for orchestrating a short squeeze akin to that seen in GameStop Corp. (GME, Financial) last year.
Making virtue out of vice
AMC has not sat idly by as its share price has skyrocketed. Indeed, it has carried off no less than three stock sales already this year, the last two of which came in back-to-back months in May and June. Collectively, these netted in excess of $2.5 billion for the company, a vast improvement to a balance sheet that had been rapidly nearing total depletion. On June 23, CEO Adam Aron again turned to investors, calling on them to authorize still more shares for future sale:
“Some of you fear dilution, but may be neglecting that equity raising is a powerful tool to strengthen a company and help shareholders. AMC said 5 times in Jan, May and June 2021 that we diluted shares, but as a result raised $2.5 billion. AMC is so much stronger because we did. AMC’s Board and Management believe you should VOTE YES to authorize 25 million new shares. Remember, they cannot be issued before January of 2022, more than six months from now. See our Proxy materials for more complete information and essential disclaimers.”
In essence, AMC has been able to leverage its staggering share price, still up more than 1,500% year to date, to pad its balance sheet and lay the groundwork for a potential turnaround.
My take
As impressive as AMC’s incredible rally has been, I am skeptical of its ability to sustain its momentum. While some might argue that the short squeeze threat has yet to fade, the company’s fundamental economics seem to refute the sustainability of the stock price. Faced with billions of dollars in debt and ongoing structural challenges, the company will likely have to keep selling shares in order to fund its operations.
In my assessment, AMC’s stock has become totally untethered from economic reality. Such conditions can persist for a while, but they rarely last forever. With further dilution already on the cards early next year, I plan to keep a safe distance from this particular name.
