Crime novelist Catherine Aird observed, “If you can’t be a good example, then you’ll just have to be a horrible warning.”
This seems to be the role of AMC Entertainment, the movie theater chain whose stock has soared in recent months.
Earlier this year, as pandemic restrictions took their toll on in-person entertainment businesses, AMC stock was trading at less than $3 per share. But over the next six months, in an unusual turn of events, the stock increased dramatically to trade above $60 per share.
This gain of more than 2,000% made AMC by far the top performing stock of 2021. Its performance more than doubled the growth of the second top-gaining stock.
But the reason for this spike had nothing to do with the company’s business prospects.
A stock is simply a tiny slice of ownership in a company. When AMC stock was priced at $3 per share, it was because the market considered the chain’s revenue sources (selling movie tickets and concessions), its liabilities (debt and leasing obligations), and its future prospects (short-term disruption and long-term decline in its segment).
For a stock to jump 20 times its value you’d expect to see a change in one of these fundamental factors. But in this case you’d be looking in vain. A fascinating drama with little to do with AMC’s core business was driving the price.
Last year, because the theater chain’s future appeared dim, institutional investors such as large hedge funds had taken significant “short” positions with the stock. In a nutshell, they would make money, if the stock’s value continued to fall.
But activist retail investors intervened.
Congregating on social media sites like Reddit, they agreed on a coordinated effort to buy up the shares of AMC, spiking its value and forcing the hedge funds into a position called a “short squeeze” where they would have to exit their positions at a loss.
Many of the small-time stock buyers participated as a protest against Wall Street’s big-money elite. Some of the buyers did it for sentimental reasons—they had fond memories of going to the movies and hoped AMC could be saved. And some bought with the hope that the stock would continue to grow.
Unfortunately for the Reddit buyers, none of these reasons has anything to do with AMC’s current and future performance in the movie theater business.
Financial writer Sean Williams points out that even without the pandemic AMC would be in trouble. Movie ticket sales have been in a two-decade-long decline and major studios have seen that they can be profitable releasing films for streaming at the same time they go to theaters.
Given these prospects, along with debt and long-term lease liabilities, it’s likely that AMC will eventually go bankrupt. And the big short-sellers will get their payout.
While chasing hot stocks for short-term gains can be exciting, it’s proven not to be a good way to invest for retirement.
You have the best chance of success with a long-term plan, a broadly diverse portfolio, and my guidance.