Here’s why I’m still avoiding AMC Entertainment shares
AMC Entertainment (NYSE:AMC) shares became a success overnight, with a 200% increase in price in one single day. As a result, it was amongst the top trending stocks. The movie theatre chain was struck hard by the pandemic. And watched its share price drop to $1.91 at the beginning of 2021. But the meme-driven market sentiment skyrocketed the stock to unbelievable levels.
The stock market is currently being headed by a trader’s frenzy. But if history has anything to say about it, such manias eventually end over the long term. And in my experience, it seldom ends well for the stocks and investors who blindly follow the hype. That’s why I am avoiding the mysterious trading territory of AMC Entertainment. Let’s look a bit deeper.
AMC shares during 2021
AMC shares were classified as penny stock at the start of this year. Today, not only have they outgrown the penny stock territory, the stock has skyrocketed abnormally high with an approximate growth of 1,500% in less than a year. And if I look at just the first six months of 2021, that performance was actually closer to 2,800%!
As exciting as the prospect of such rapid growth can be, this level of volatility comes with many risks. Since the valuation is being driven by speculation rather than fundamentals, the share price is ultimately based on the mood of traders. So it’s not surprising to see sudden double-digit drops. For example, when AMC shares hit their highest point in June this year, the price fell by almost 50% only a few days later and haven’t recovered since.
Entering dangerous trading territory
AMC’s stock performance has been highly volatile. While this is a breeding ground of opportunity for short-term traders, it’s a dangerous territory to tread on for long-term investors like me. These highly volatile stocks run on the emotions of the investors and grow on their greed. The volatility of these stocks has zero relevance to the performance and operational capabilities of the companies. As a result, the upward momentum often comes crashing down. This is why analysts are starting to link today’s market behaviour with the Dot-com bubble in the late 1990s.
Undoubtedly, intelligent traders have earned tremendously from the massive surge in AMC shares and other meme stocks. After all, a small investment of $100 would have grown to $1,000 in January alone. But as alluring as this performance can see, without any underlying fundamentals backing up the gains, I remain untempted.
Having said that, the movie-theatre company has not lost focus. While the financials may not be the healthiest, management has progressed in sorting out several key issues. Some of its high-interest bearing loans have been repaid thanks to cinemas reopening their doors, allowing money to flow again. And the group is looking to expand into new audience experiences such as gaming. If this new strategy proves successful, the company might get out of its current financial pickle.
Volatility and risk go side by side. Accepting risk is a normal and unavoidable part of any investor’s or trader’s journey in the stock market. But in the case of AMC shares, volatility and risk both are running at their extreme levels, in my opinion. Personally, I don’t think the risk is worth the reward. And buying AMC looks more like gambling than investing. So, I still won’t be adding this business to my portfolio any time soon.
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Covid-19 has devastated the global markets. But this stock has been thriving and has doubled its revenue for the last five years, even in 2020! What's more, due to the recent volatility in the stock market, The Money Cog analysts feel the stock is grossly undervalued.
Needless to say, I believe it's a fantastic business that could become an industry leader in the future!
Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.