UK investors have been buying shares in US cinema operator AMC Entertainment (NYSE: AMC) recently. Last week, AMC was the fifth most purchased stock on Hargreaves Lansdown.
Should I follow the crowd and buy AMC stock for my portfolio? Let’s take a look at the investment case.
AMC Entertainment: could we see another short squeeze?
I can see why AMC Entertainment stock is popular right now. For starters, AMC looks like a good reopening stock, in theory.
In its first-quarter results, AMC said the majority of its 600 cinemas in the US were open. However, they were only operating at a capacity of between 15% and 60%.
Meanwhile, in Europe, only about 27% of its cinemas were open at the end of the first quarter. Now that vaccines are being rolled out and social distancing measures are being relaxed, the company should be able to boost its capacity significantly.
Secondly, there’s talk of another short squeeze here. This occurs when a heavily-shorted stock is in high demand from investors. The demand pushes the share price up, forcing short sellers to buy shares too to close their short positions. This pushes the share price even higher.
According to HypeEquity, which analyses social-media activity on stocks and tracks what it calls ‘social sentiment analysis’, mentions of AMC stock spiked more than 800% last Tuesday morning. And roughly 8% of the comments on the stock included the word ‘squeeze.’
I could lose money on AMC stock
I have a few concerns about investing in AMC stock however. One is the company’s valuation. Right now, AMC has a market-cap of around $5.4bn. While that’s not huge by today’s standards (Netflix has a market-cap of $220bn), it’s about seven times the company’s market-cap at the end of 2019 – when it generated an all-time revenue high of $5.5bn for the year.
This valuation just doesn’t make any sense, to my mind, when you consider that revenues are likely to remain depressed for a while.
Another concern is analyst sentiment. At the moment, the average price target for AMC stock is just $4.86. That’s about 60% below the current share price. That’s a lot of risk to the downside.
A third issue is that the cinema industry is facing structural challenges due to competition from streaming businesses, such as Netflix and Disney. Figures show US box office ticket sales peaked in 2002 at 1.576bn tickets and fell to 1.229bn in 2019.
Finally, let’s talk about the short interest at AMC. According to data provider 2iQ Research, AMC’s is currently a high 33%. That tells us a lot of sophisticated investors are betting that the stock is going to fall.
Of course, with that level of short interest, we could potentially see another short squeeze. However, I don’t think buying a high-risk stock for a potential short squeeze is a smart investment strategy.
It’s worth pointing out that 2iQ’s data shows that total shares on loan actually increased from about 110m to 124m late last week, which suggests short sellers are ramping up their downside bets on the stock. This is bearish, in my view.
AMC stock: my move now
Weighing everything up, the risks outweigh the rewards here, in my opinion. I think there are much better stocks I could buy today.
Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK owns shares of and has recommended Netflix and Walt Disney. 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.