AMC Entertainment (NYSE: AMC) is one of the so-called meme stocks that have dominated the financial news flow for much of the year. Last week, AMC was heavily featured because of the volatility of its shares (weekly range last week $28.53 to $72.62). The volatility was especially interesting in that AMC did two equity issues during the week, one a private transaction for $230.5 million (via Murdoch Capital, see Reuters here), and one a more traditional secondary “at the market” placement that raised $587.4 million (see Investor’s Business Daily here). These two equity issues, along with a separate issue for $428 million in mid-May, meant that AMC raised nearly $1.25 billion in three weeks as the company’s shares rallied. This sequence of events says a lot about meme stocks!
What is a meme stock? A meme stock has two main characteristics.
A meme stock is prone to wild gyrations in its price unrelated to fundamentals, company announcements or news. Most of the sharp upswings are caused by some combination of FOMO (“fear of missing out”), short-covering and large volume buyers of short-dated, out-of-the-money call options. Sharp downswings are driven by panic-selling, and volatility halts are common.
A meme stock is heavily traded by retail investors, or as some pundits might say, “the Reddit crowd.” Reddit is a social media site heavily populated by retail investors searching for themes, and once they gather around a stock, they buy in small increments but across a large number of investors. By acting swiftly and in tandem, they can move the price of a meme stock very significantly. This price trajectory creates substantial momentum, often drawing in big money momentum investors that align with retail pushing the price even higher.
The primary criteria for selecting stocks by this cadre of retail investors is out-of-favour companies, generally small- to mid-cap companies which have seen their stocks heavily shorted as institutional investors bet against their future prospects. As retail investors pile into the shares of these companies, pushing their shares higher, investors that are short – generally hedge funds – have to cover their positions to limit losses. This recurring cycle turbo-charges the upward trajectory in the stock price and often leads to sharp price gaps up. Simultaneously, dealers write call options at ever-higher strike prices to satisfy increasing demand from (principally) retail investors as they pile into the stocks via leveraged trades (i.e. call options). To hedge their positions, the dealers buy underlying shares against the new call options they are writing, adding more price pressure on the shares. This confluence of circumstances largely drove the very unusual price action in GameStop (NASDAQ: GME) earlier this year. GME dominated the news flow in late January as the shares gapped up to an intraday high of $483/share on January 28th, before eventually falling to below $50/share intraday a little more than two weeks later. I wrote about GME in emorningcoffee.com on January 27th, and you can find that article here.
The table below shows five of the more actively traded meme stocks and select attributes, including valuation metrics, 52-week stock price range, recent price movement, short interest and trading volumes/trends. For AMC, please note that I have included two lines, the second of which is a valuation based on FY2019 (pre-pandemic) operating results so as to provide more context on the potential of AMC as the pandemic subsides and people return to cinemas. The first of these two tables contains select historical operating data so you can understand the size of each company, its operating performance and its debt levels. The second table contains valuation, stock price metrics, short interest and trading volumes.
Focusing on AMC, the company’s stock has a 52-week trading range of $1.91/share to $72.62/share, an incredibly broad range over a 52-week period. At its closing price on June 8th ($55.23/share), AMC shares had appreciated 26.0x since the end of 2020 and 4.6x since May 21st. As far as trading volumes, AMC has traded almost as many shares each day over the past 10 days than there are shares outstanding (99.4% of outstanding shares/day on average).
You can see in the graph below both the price level and daily trading volumes for AMC, seeing both the initial surge in price and volume in late January, followed by the second surge that started in May. Other meme stocks have similar graphs although the periods might differ.
As you can see in the table earlier, three of the most actively traded stocks – AMC, GME and BBBY – have high short interests that are above 20% of float. Based on performance, you can understand the negative view of investors which focus on fundamentals, as all of the companies are money-losers with very heady and difficult-to-justify valuations based on future cash flows, multiples of revenues, or whatever metric you might choose.
To provide some further context on the short interests and trading volumes of the meme stocks, I have included a table below in which I extracted the 100th to 400th ranked companies that comprise the S&P 500 index in increments of 50s.
As you can see in the table above, the market value of equity of these S&P 500 companies (on May 17th) ranged from $16.1 billion (400th, ROL) to $84.6 billion (100th, ADP). In contrast, with the exception of KOSS, the meme stocks range in market capitalisation from $3.6 billion (BBBY) to $28.2 billion (AMC). As far as comparing trading volumes, this select group of S&P 500 stocks all have 10-day average trading volumes of less than 1% of float, whilst the meme stocks have significantly higher daily trading volumes. Similarly, with short interest of 1%-2% on average for the S&P 500 stocks in this table, the meme stocks have substantially higher short trading interests, providing the rocket fuel for upward gaps in prices for reasons I touched on earlier.
You have seen some of the more interesting characteristics of meme stocks, and fundamentally, nearly all look substantially overvalued. What do sell-side analysts, naturally biased towards the upside, think? The table below shows the average consensus analysts’ rankings on a scale of 1 (strong buy) to 5 (sell) using data from YahooFinance.com. The table also shows analysts’ consensus price targets. If you weren’t convinced before, you should now see just how overvalued these companies are by varying degrees, with AMC clearly leading the meme stocks at the moment.
With this background, let me close by focusing on AMC specifically. The financial press has provided plenty of coverage about the capital raising efforts of AMC over the last week or two as the company took advantage of its lofty share price to continue the rehabilitation of its capital structure and prepare for the post-pandemic period. Even so, keep in mind that the assistance provided by governments in the US and Europe to cinema chains and other badly-affected businesses (travel companies, restaurants, etc) in the early stages of the pandemic managed to see off numerous bankruptcy filings. Support not only came from governments, but also from central banks, at least in the US where the Federal Reserve decided in March 2020 to expand its purchase of bonds to include high yield ETFs and “fallen angels”. This policy action helped to gradually restore confidence to a very fragile market in which credit would have almost certainly seized up otherwise, leading to the failure of many companies that would have been unable to refinance maturing debt. Although meme equity investors have been the most recent beneficiaries of these “recovery bets”, the fact is that credit investors who bought into stressed debt of these and similar companies most badly affected by the pandemic in April and May 2020 also profited significantly as bond prices recovered. Interestingly, a subset of these companies later became the meme stocks we follow with so much interest today.
So how has AMC performed vis-à-vis its cinema peers? I am not going to drift into the risks and headwinds facing the cinema business globally, many of which were present before the pandemic and will continue afterwards. However, the table below compares three of the world’s cinema chains to one another both for the pre-pandemic period ended Dec 31st, 2019 and the LFQ, ended either March 31st 2021 (AMC and CNE) or December 31st, 2020 (UK-based company CNNWF). As I mentioned earlier, it probably makes most sense to look at valuations vis-à-vis the financial results of these cinemas before the pandemic (i.e. Y/E December 31st, 2019), on the basis that they can eventually return to these operating levels post-pandemic.
As you can see in this table, the market caps of both CNM and CNNWF fell significantly – quite rightly as their business prospects dimmed – from the end of 2019 (pre-pandemic) to the end of the 1Q2021, whilst AMC’s market cap has increased nearly six times over the same period. If that isn’t surprising enough, look at what has happened since the end of March! Characteristic of meme stocks, the market value of equity of AMC has increased another six times –to over $28 billion – compared to its valuation on March 31, 2021 of $4.6 billion, and 36 times its pre-pandemic level valuation of $775 million at the end of 2019. (Note that AMC has issued a significant amount of new equity such that the outstanding shares since the end of 2019 have increased nearly five times whilst the share price has increased 7.6 times.) I suppose it goes without saying that this sort of increase in market value of AMC makes little sense given the dramatic deterioration in the company’s underlying business and future prospects. Even with the recent equity raised and using FY2019 EBITDA as a pre-pandemic proxy, AMC remains substantially more highly leveraged and therefore more risky than the two other cinema peers included in this table, neither of which have seen their values increase at all. All of the pre-pandemic headwinds for cinema companies remain, compounded by uncertainties around the industry post-pandemic as the global economy slowly recovers.
AMC, like other meme stocks, has taken on a life of its own independent of its business fundamentals. The stock is so materially over-valued it is hard to believe. However, as investors have learned, the power of retail investors acting in tandem against a heavily shorted stock, seizing on the rapid price action upwards, can be very rewarding. These stocks are not for me because I am rooted in fundamental analysis, but it is hard to argue with the results for those investors that have gotten the timing right on meme stocks.
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