AMC Entertainment Holdings (NYSE:AMC) is a US-based cinema chain. Known simply as AMC, it has gained publicity in 2021 due to a large retail following. In fact, it’s one of the original ‘Reddit stocks’ made popular at the start of the year. Although large daily moves aren’t unusual for such stocks, the AMC share price jumped 20% yesterday. Here’s why it happened and what I’m thinking.
Another short squeeze?
The main reason behind the AMC share price jump was another short squeeze. To understand this concept, I first need to understand how to short a stock. If I think that a stock is overvalued or might fall, I can express this view by shorting it. This involves borrowing the stock that I don’t own and selling it on the market with the aim of buying it back at a lower price. The difference between the price I sold it for and the lower price I buy it back at is my profit.
In practice, this is something that hedge funds can do on a large scale. The big risk is that a short squeeze happens. This is when the share price starts to increase. If a fund wants to close the trade, it has to buy back the stock. This buying actually pushes the share price even higher!
For AMC shares, over the past couple of weeks the percentage of share being held short has been getting quite high. At the start of the week it stood at almost 17%. So even with a small move higher, it appears a lot of short sellers were closing out positions yesterday. This helped drive the move higher.
Jumping on the bandwagon
Another reason for the move higher yesterday was positive risk sentiment. I can see this because if I look at other meme stocks, a similar move occurred. For example, the GameStop share price soared 27% yesterday as well. The momentum that such swings can bring does attract a lot of investors in the short run.
The positive mood only has to show itself for a few hours, but with the rise of day-trading and algorithms, the moves can explode higher.
A clear disconnect with the AMC share price
In my opinion, the AMC share price is likely to stay volatile for some time. However, I struggle to see fundamental long-term value in holding it given the losses it’s making. This is why I think hedge funds are shorting the stock, as they know it doesn’t have value at current levels.
I recently wrote about the struggles of another cinema chain, Cineworld. The company has seen the share price plummet and become a penny stock due to the lockdowns. The situation is starting to ease but the recovery road is a long one.
AMC has had a similar experience, yet with the big difference of a rising (not falling) share price! I think this shows the clear disconnect between reality in the sector and the speculative trading of retail investors.
On that basis, even though the move higher could continue in the short run, I’m going to be staying away from buying AMC shares.
