WSB Finimized: Will Redditors’ Bets On An AMC Rally Succeed?

WSB Finimized: Will Redditors’ Bets On An AMC Rally Succeed?
Reda Farran, CFA

about 3 years ago3 mins

Mentioned in story

This article is the first in a series we’ll be running all week examining popular trade ideas posted on the WallStreetBets Reddit forum.

What’s going on?

Movie theaters are unsurprisingly struggling to get through the coronavirus pandemic, with US attendance dropping by more than 80%. So when hedge funds flocked en masse to short – or bet against – shares in AMC, the world’s largest movie theater chain, it raised very few eyebrows.

For some traders on WallStreetBets, however, such elevated shorting of a stock is currently like a red rag to a bull: they want to engineer a so-called short squeeze by buying up the stock en masse and driving it higher. After the tactic saw success with video game retailer GameStop last week, is AMC destined to follow? 

Why could it happen?

For starters, as Reddit user SnooWalruses7854 spotted, AMC had a high short interest: the number of shares bet against as a percentage of the total. That means the stock was susceptible to a short squeeze, especially if many individual traders bought in, pushing up its price and forcing the hedge funds who’d sold it short to cut their losses and buy.

Secondly, AMC took advantage of its stock price surging by more than 500% this year to sell a cool $500 million of new shares to investors – a handy cash injection for a company struggling to weather the pandemic. This is a great example of legendary investor George Soros’s theory of reflexivity, which talks about the existence of self-reinforcing feedback loops where investor perceptions can influence reality. Here, individual traders’ perceptions that AMC’s stock is a good investment ended up influencing reality: AMC now has the cash to survive 2021 and a stronger position when negotiating with landlords to amend the terms on certain leases. (For more on Soros, we have an entire Pack on his investing philosophy if you scroll to the end of this article).

Finally, if AMC can survive until a decent chunk of the population has received a coronavirus vaccine, then it might see a big rebound in business from a combination of a huge movie backlog and people desperate to resume their social lives. AMC has also renovated many of its locations and that could add further appeal to would-be moviegoers. 

Where could it go wrong?

AMC’s short interest is being overstated by many websites, and it’s not as high as you might think. That's because some calculations aren't factoring in AMC’s recent share sale, which boosted the amount of stock in circulation. Data provider S3 Partners estimates only 16% of the company’s shares were shorted as of last Friday.

Even if this percentage was higher, it doesn’t necessarily mean a short squeeze is inevitable. That’s because AMC is reportedly considering issuing even more shares – which would give short sellers the opportunity to buy stock and close out their positions without squeezing the price higher. 

Further undermining the case for an AMC squeeze is the lack of unity among the WallStreetBets community: some members, like WolfOfNallStreet, suspect AMC’s name is being floated around by short sellers of GameStop as a distraction. And, of course, online brokers could again prevent investors from purchasing shares or call options in AMC as we saw last week.

The last important thing to touch on is whether AMC’s struggles are temporary or something more structural. Yes, the company may have raised the money necessary to see off the coronavirus storm, but can it survive the longer-term trend toward home streaming? The number of movie theater tickets sold in North America peaked in 2002 at 1.6 billion. By 2019, that number had dropped 25% to 1.2 billion – even as the population of the United States increased by roughly 15%. If this trend continues and AMC cannot adapt its business model accordingly, the company could find itself in trouble.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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