Daily Brief: AMC Entertainment Buys Into The Hype, But Goldman Sachs Doesn’t Think You Should

Daily Brief: AMC Entertainment Buys Into The Hype, But Goldman Sachs Doesn’t Think You Should

over 2 years ago3 mins

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AMC Entertainment hit a nearly $30 billion valuation early on Thursday, making the theater chain superstar bigger than half the companies in the key US stock market index.

What does this mean?

AMC’s stock is up around 400% this week and over 2,800% this year alone, but it’s hard to put this rally solely down to Redditors. The bigger a company, after all, the tougher it is for retail investors – whose wallets are a lot smaller than their institutional counterparts’ – to influence its value.

AMC market cap

Then again, they do have the means to tussle with the heavy-hitters: retail investors have leverage and call options at their fingertips, both of which amplify the impact of small bets. And given how quickly “short sellers” – investors betting AMC’s price will fall – were losing money earlier this week, they might’ve raced to buy shares in hopes of reversing their bets and limiting their losses. That, in turn, would’ve pushed AMC’s stock even higher.

AMC share price

Why should I care?

For markets: AMC is making hay while the sun shines.

AMC has been taking full advantage of the hype around its stock: the company’s been selling new shares at their recently bolstered price, and it just announced it’d be selling almost 12 million more in due course. And you can’t exactly blame the firm, which has been hemorrhaging cash since the pandemic forced its theaters shut. Now that its coffers are refilled, though, it should be better able to bounce back as things reopen.

Zooming in: AMC’s valuation is hard to justify.

AMC’s shares are currently trading for approximately 12 times next year’s forecasted sales, compared to US rivals Cinemark and IMAX’s 3 and 5 times respectively. But that lead probably isn’t sustainable: Goldman Sachs said on Wednesday that the short-term boost from a recovery has already been factored into cinema stocks, and that the acceleration toward streaming platforms will crimp earnings in the longer run.

Keep reading for our next story...

The Federal Reserve Is Selling Off Bonds

Fed image

The US Federal Reserve (the Fed) announced this week that it’d be selling $14 billion worth of corporate bonds, and suspicious investors might be reading too much into it…

What does this mean?

When the pandemic kicked off last year, the Fed bought up a host of corporate bonds to help companies stay on two feet as things descended into chaos. But now that things have settled down, it’s decided to sell some of them off. It’s worth pointing out, of course, that the Fed’s still buying around $120 billion worth of assets every month, so this sell-off is just a drop in the ocean. But for investors, it’s another in a long line of hints that interest rates are set to rise sooner rather than later.

Fed emergency measures

Why should I care?

For markets: The interest rate fear is real.

Investors were expecting the Fed to hold onto these bonds until they were fully paid off, so the central bank’s decision will increase the overall supply. All else equal, that’ll send prices down and yields – which move in the opposite direction – up. And since investors use existing yields to inform interest rates on new bonds, the move will effectively increase rates in the market – which isn’t great news for companies’ earnings and, by extension, their share prices.

The bigger picture: Your guess is as good as theirs.

Investors might’ve seen something like this coming: US inflation is at record highs, so this could be a stopgap before eventually raising interest rates directly. But it remains to be seen whether the sell-off will actually slow down rising prices. That’s especially true given fresh data out on Thursday that showed the private sector added more jobs than expected last month, which could lead to more consumer spending and higher economic growth. Then again, there’s hope yet: data out on Friday is expected to show that wage growth isn’t recovering even if job growth is.

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