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AMC stock is flying. Should I buy now?

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Shares in US cinema operator AMC Entertainment (NYSE: AMC) have had an incredible run recently. Last week, the stock rose 85%. Over a year, AMC is up around 710%.

It appears UK investors have been getting in on the action. Last week, AMC was the most purchased stock on Hargreaves Lansdown by a wide margin. It was also the most traded stock on Freetrade, with buy orders up 300%.

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Should I buy AMC myself? Let’s take a look at what’s going on.

Why AMC stock is rising

The reason AMC stock has surged over the last few weeks is that Reddit (WallStreetBets) traders have piled into it. As a result, it appears to have experienced a combination of a ‘short squeeze’ and a ‘gamma squeeze’.

A short squeeze occurs when short sellers (who have borrowed shares and sold them in order to try to profit from a falling share price) buy back shares to close their short positions.

A gamma squeeze occurs when options traders buy large quantities of call options (which give the trader the right to buy the stock at a set price in the future). This forces market makers to buy stock in order to hedge their risk exposure. As it continues to rise, market-makers must continue buying more to maintain their hedges, further boosting the share price.

Ultimately, the huge share price rise has very little to do with the company’s fundamentals. Don’t take my word for it. In a regulatory filing on Thursday, AMC said: “We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals.”

90% downside

Looking at AMC stock now, I see it as a very risky investment. Sure, there have been some positive developments recently. Last week, for example, the company sold 11.6 million shares at an average price of around $51 each, raising nearly $590m. This will strengthen the company’s balance sheet.

The company should also benefit as the US reopens in the months ahead. This year, analysts expect revenues to be double what they were last year.

However, right now, the company’s share price and valuation make no sense at all, in my view. Currently, AMC’s share price is nine times Wall Street’s average target of $5.25. In other words, if Wall Street analysts are right, the stock could lose 90% of its value.

AMC’s warning to investors 

It’s worth noting that, in a very unusual move, AMC has actually warned investors about buying its stock at the moment.

Under the circumstances, we caution you against investing in our Class A common stock unless you are prepared to incur the risk of losing all or a substantial portion of your investment,” it said in a filing last week.

And Vanda Research, which tracks retail investor flows, said interest in AMC stock may have peaked last Wednesday. Since Wednesday, the stock has fallen 23% (which shows how dangerous these kinds of ‘meme’ stocks can be if my timing is poor).

Better stocks to buy

Of course, AMC stock could keep rising. Currently, short interest remains high. The short squeeze could have further to go.

However, given the risks, I will be avoiding AMC. I think there are much better stocks I could buy.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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