As the AMC Entertainment share price falls further, should I buy?

I missed a chance to buy before the early surge. But now the AMC share price is weakening, I’m taking a closer look at this US stock.

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AMC Entertainment (NYSE: AMC) is off to a weak start in July. The AMC share price closed Wednesday at $45, down 20% on the month so far. And since a 2021 high of a shade over $72 in early June, we’re looking at a loss of 37.5%. But if there’s any stock where we need to look at the bigger picture, this is it.

After an astonishing climb in May, AMC shares are still up nearly 1,000% over the past 12 months. So what’s happening, and should I buy? Is it a growth stock offering me a buying opportunity after missing it earlier in the year? Or is it a bubble waiting to burst, that has already started leaking?

I’ll start by summing up what’s happened. AMC is what’s becoming known these days as a ‘meme’ stock. I’ve seen plenty of investing fads come and go in my time, with small investors jumping on short-term bandwagons. But this is a bit different, thanks to the effect of social media. In particular, it’s down to a Reddit group known as ‘WallStreetBets’.

AMC share price targeted

AMC is a US cinema chain, and it suffered badly during the Covid-19 crisis. To make things worse, short sellers hit it hard, expecting the AMC share price to fall ever further. That’s when the Reddit crowd stepped in, encouraging each other to buy, and push AMC shares upwards. It created a ‘short squeeze’, which forces short sellers to buy to cover their losing positions. And that, in turn, pushes the price up even further.

There’s also been a thing called a ‘gamma squeeze’, which my Motley Fool colleague Edward Sheldon has explained. It’s a further squeeze based on call options, and it just pushes the price up yet again.

Some investors have made big profits on AMC Entertainment in the past few months. And plenty, especially the short sellers, will have lost a packet. So are there any gains I could make by buying now, especially with the stock weakening?

More gains to come?

Well, there does appear to still be a fair bit of short interest. So I could maybe make some money if the short squeeze takes off again. On the other hand, shorters buying in at today’s high prices might have called it just right. If the AMC share price does collapse in the coming weeks and months, they might pull off the short of the century.

I don’t go in for short-term trading like this at all, so I’m out for that reason. But the sad thing is that I think the company itself could be set for a turnaround. The US is opening up, and I reckon we could easily see a few years of strong earnings growth for AMC. If it wasn’t for all this short-selling and Reddit meme business clouding the issue, I’d be looking seriously at the stock.

I’ll leave the last word to AMC itself, which warned last week: “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.”

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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