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3 reasons why I’m avoiding AMC shares

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Cineworld cinema
Image source: DCM

AMC Entertainment (NYSE:AMC) shares have seen a rapid move higher to above $58 since the start of the year. The company has been part of the social media and chat room sites retail buying wave. As such, it’s one of the shares that has been called a meme stock. It may be one of the best performing companies globally this year, with a share price increase from $2 to that $58 in six months, but I’m still avoiding it. Here’s why.

Disconnect

The first reason I’m avoiding AMC shares is the disconnect between the price and the fundamental outlook. For those not familiar, AMC is a US-based cinema chain. It does have sites in Europe as well, but the bulk are in the US.

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Clearly, the pandemic has negatively impacted business. Net profit before tax for 2020 was a loss in excess of $4.5bn due to the closure of many sites around the world.

Even in the Q1 update, things didn’t read much better. With regards to the US locations, it noted that “as of March 31 2021, AMC was operating at 585 domestic theatres with limited seating capacities of between 15% and 60%, representing approximately 99% of domestic theatres.”

Based on the 2020 loss and the fact that capacity (and demand) is unlikely to be materially higher in the near term, the rise in AMC shares just doesn’t add up to me. 

Meme stock volatility

Another reason why I’m steering clear of AMC shares is due to the nature of meme stocks. Even though the trend’s history is limited, it shows that the retail base tend to pump up a stock then move on to another one. GameStop used to be the stock in focus, and now this has shifted to AMC. 

In a few months’ time, attention will likely turn to another stock. The danger here is that if I buy AMC shares now, I might be buying at the top of the market. Given my view on the fundamental situation expressed above, do I really want to be buying shares at all time highs?

Meme stocks also exhibit high levels of volatility. An exceptionally large amount of shares change hands on certain days with AMC, which can create unusually large or erratic day swings. This ultimately increases the risk of holding the shares.

Alternatives to AMC shares

Finally, I’m avoiding buying AMC shares simply because I think there are better stocks to buy right now. With a market cap of almost $30bn, despite debt of over $10bn and negative net assets, I think there are much better places to find value without the risk levels.

I’d look for companies with stronger balance sheets and more robust customer demand. For example, I recently wrote about how I like Virgin Money as an investment. With this, I don’t have to sacrifice share price gains. Virgin Money shares are up over 100% in the past year.

On balance, I could be wrong about AMC shares. The fundamental value could improve this year, especially if debt is reduced and revenue increases. If it continues to be the centre of attention then more retail investors could pile in. However, in my opinion there are just too many red flags.

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jonathansmith1 does not own shares in any firm 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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