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UK investors are still buying AMC Entertainment stock. Should I?

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AMC Entertainment (NYSE: AMC) stock continues to grab headlines. In less than two weeks, the US cinema owner has more than doubled in value. No wonder then that it showed as being the most popular buy among clients of online platform Hargreaves Lansdown last week.

Should I get involved like other UK investors or steer clear? Here’s my take.

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Why is AMC stock flying?

It all seems to be down to what’s known in the business as a short squeeze. This is where previously unpopular stocks are heavily bought, forcing those who were betting the share price to fall to hastily exit their positions. This involves buying back stock they previously ‘sold’ which, in turn, causes the share price to lurch violently upwards. 

Naturally, there’s a catalyst for all this buying pressure. The huge rise seen in the value of AMC stock over the last week originates from the popular Reddit subgroup WallStBets. By coordinating their buys and pumping the stock on social media, this community (which boasts a staggering 10 million members) has succeeded in creating huge losses for hedge funds that think the company will continue to struggle. Last Thursday, it was the most actively traded stock on the entire New York Stock Exchange. 

If all this sounds familiar, it’s because we’ve been here before. In January, the value of AMC stock pretty much ten-bagged. The share price of video game retailer GameStop also soared, as did those of companies in the cannabis space. With gains like this, who wouldn’t be tempted to grab a slice of the action?

Buyer beware

Investors are routinely reminded that ‘past performance is no guide to future returns’. This is, of course, perfectly sensible advice. Even so, I do think history can offer us some ideas about what might happen next.  

Having soared to $347 towards the end of January, Gamestop stock tumbled to just $40 a few weeks later. It’s now back at $222. This shows just how volatile share prices can get when they’re influenced by little more than social media fanfare. I think we could see a similar scenario unfold from here. Anyone buying now could do very well. Or they could lose their shirt.

To really understand what I might be taking on, I also need to look at AMC’s fundamentals. And I don’t like what I see. Based on Friday’s close, AMC now commands a valuation of almost £12bn. That looks excessive when the company’s outlook is considered.

Like London-listed Cineworld, the company faces a myriad of challenges going forward. In addition to the uncertainty surrounding the coronavirus, AMC must also contend with the threat of more people streaming new movies at home. Yes, the current slate of films is encouraging but I also need to remember that success is never guaranteed. Studios can’t know in advance whether they will manage to recoup costs and cinemas can’t predict revenue and profits with much certainty. This is why UK fund managers such as Terry Smith avoid the industry.

Steering clear

Can money still be made by trading AMC stock? Very possibly. But I’m an investor, not a trader. Consequently, I think there are far less risky options out there for people like me. If I were to get involved, it would only be with money I could afford to lose. 

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Paul Summers has no position in any of the shares mentioned. 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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