To understand why I think AMC Entertainment (NYSE: AMC) stock will be worth buying again, it’s important to know what a short seller and a short squeeze actually is.
A short seller is someone who borrows shares of a stock from a broker. This stock is then bought by a buyer who is willing to pay at market price. The short seller is hoping that the price of the share drops so that they can buy back at a lower price and turn profit.
A short squeeze occurs when short sellers decide to close their position to cut their losses because the stock price has risen. Their exit pushes the share price higher and attracts even more buyers, which can lead to an astronomical jump in price.
What will cause a short squeeze on AMC Entertainment stock?
There are many reasons for the anticipation of a short squeeze on AMC Entertainment stock and this is why I am looking to invest:
- On July 6th, AMC closed at US$49.96. AMC’s price is continuing to rise because of its volume, regardless of the attacks from short sellers. If the price proceeds in this trajectory, short sellers will have to close to cut losses.
- Hedge funds like Melvin Capital are losing big because they are short selling meme stocks like AMC and GameStop. This means hedge funds will need short sellers to close their positions to stop further suffering.
- AMC is not a dead company. It is generating good revenue with US$2.2 billion in cash.
- The roll out of vaccinations and lifting of restrictions means a return to normal for cinema goers.
- AMC is the most shorted stock on the market.
- AMC’s short borrow fee (this is the interest shorts pay for borrowing AMC shares) hasn’t stopped rising.
- AMC’s Q1 report shows earnings improved from Q4 2020.
These are all great signs for holders and new buyers of AMC Entertainment stocks. The hardest part for me is timing my investment correctly so that I can benefit just before the short squeeze occurs. By watching for that dip in the market, I believe there will be a profitable opportunity for me to join in on this super successful meme stock.
Will I invest?
Investors in AMC Entertainment stocks should recognise its volatility and high risk/high reward status. Large amounts of these shares will be sold and bought every day and that can cause the price to act unusually and erratically. I only invest money in meme stocks like AMC that I can afford to lose.
However, there is a lot of excitement and speculation around the potential short squeeze of AMC Entertainment stocks. This Fool will be investing in AMC Entertainment after the price dips because I believe there will be a short squeeze and a huge surge in share price in the next few months.
Note: To buy US stocks you will need to complete a W-8BEN form with your broker.
John Town 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.