Like GameStop, AMC stock is now riding the Reddit wave: What is a meme stock and is it right for your market portfolio?

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First GameStop, then silver. Reddit users are putting hedge funds to the test, one short squeeze at a time. Here’s what you need to know. USA TODAY

It’s not often that companies try to sell their stock alongside a warning that, if you buy shares, you could lose it all.

But that’s precisely what AMC Entertainment did Thursday when it disclosed plans to sell up to 11.55 million shares in a bid to capitalizing on the incredible surge in its stock price fueled by retail traders banding together online to hurt sophisticated Wall Street investors.

“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last,” the company warned in a Securities and Exchange Commission filing.

“Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”

The statement came after AMC shares ballooned 67% on Wednesday, closing at $62.55 in a continuation of the meteoric rise powered by social media buzz despite the company’s significant challenges.

The shares were trading down 2% in pre-marketing trading Thursday as investors digested the news of the company’s plans to issue new shares, which will dilute their existing stakes.

The SEC filing drew attention for the unusual way in which it marketed shares for sale but warned people against buying them unless they’re ready to lose it all.

“Did Yogi Berra write the offering documents?” Bespoke Investment Group analyst Paul Hickey wrote in an analysis.

AMC has had a tumultuous ride since the pandemic began.

The company’s theaters temporarily closed, leading to a collapse in revenue and placing the chain on the verge of insolvency.

That’s when retail traders rallied behind AMC stock, sending the shares soaring in a bid to undermine sophisticated Wall Street investors who had bet on the stock to implode.

Now, with movie theaters reopened and moviegoers returning to see shows, there is some hope on the horizon. Yet the company’s financial situation remains rocky.

Still, the company’s stock is on a run, having more than quintupled in the last month and increased more than 30-fold since the start of the year.

Here’s what you need to know about what’s happening with AMC. 

Why is AMC stock rising?

In short, because retailer traders are loosely organizing a bid via social media messaging boards to drive up the company’s shares.

In recent days, the stock has also gotten a boost from a promising box office performance for movies like “A Quiet Place 2” and “Cruella,” raising hopes that more Americans may return to theaters as the pandemic continues to subside.

Traders are also apparently emboldened by news that AMC raised more than $230 million by selling 8.5 million shares of its common stock to Mudrick Capital Management. That was followed by a Bloomberg report that Mudrick had already moved to sell its stake at a profit, viewing the company as overvalued.

Typically news of a company diluting its stock by issuing more shares, as well as news of a major shareholder offloading its stake, would be viewed as a bad sign. But the typical rules don’t necessarily apply here.

“The retail force behind this movement is still strong, so it is anyone’s guess how much larger this bubble can grow,” Oanda analyst Edward Moya wrote Tuesday in an analysis.

Is that also why GameStop stock rose?

Similar forces that have marshaled to drive up AMC shares are also at work in the GameStop saga.

Essentially, a coordinated group of retail traders grew upset at how hedge funds make money by betting that struggling companies’ stocks will decline in value. So they buy up the shares, driving the price up and forcing the hedge funds to suffer huge losses on their “shorts.”

In the latest development for GameStop, the company’s stock experienced a boost after Keith “Roaring Kitty” Gill, a major social media influencer, tweeted for the first time in more than a month.

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USA Today’s personal finance and markets reporter Jessica Menton breaks down how hedge fund day traders are being wrecked by Reddit users. USA TODAY

“His tweet contained a screenshot of a video from the ‘Six Stinky Cats’ Gang,” Moya wrote. “In typical Reddit Army trading fashion, the simple reminder of Roaring Kitty’s presence excited retail traders.”

What is a meme stock?

A meme stock is any publicly traded company that is benefiting from the forces described above – a band of ordinary investors who are using social media to drive interest in the company’s shares.

GameStop and AMC are the two most notable examples.

But there have been others that have also enjoyed some modest increases, such as Bed Bath & Beyond and BlackBerry.

What’s happening with Bed Bath & Beyond stock?

Again, it’s a similar story. Like GameStop, the retailer has been struggling in recent years. But traders have rallied around its shares.

Bed Bath & Beyond stock rose 59% to $44.19 on Wednesday. 

What is a Reddit stock?

Any stock that has benefited from traders organizing to boost it via the social messaging board Reddit. Again, GameStop, AMC and Bed Bath & Beyond are among these.

A subreddit (essentially a message board on Reddit dedicated to a specific topic) called WallStreetBets has been the focal point of much of the activity.

Should these stocks be part of your investment portfolio?

Every investor’s situation is different. But in general, you need to be ready to stomach extreme volatility if you invest in a meme stock. The up and down swings can be intense.

You can make a lot. Some have made a fortune. But you can also lose a lot, or even lose it all.

And it’s always critical to keep in mind that when a company’s underlying finances remain distressed, there can be a risk of collapse or even bankruptcy, which typically results in shareholders losing everything.

Has AMC turned a corner?

It’s hard to say. 

AMC Entertainment lost about $4.6 billion in 2020, compared with a loss of $149 million in 2019. The company’s revenue fell 77% to $1.24 billion, as sales of American tickets declined 81%.

Those are some ugly numbers.

Yes, the most recent box-office results provided some hope. But the company remains challenged by Hollywood’s increasing willingness to put movies on streaming platforms like Netflix, Hulu, Disney+ and HBO Max.

The company warned last year that it might not survive.

“We see some indications of strong pent-up demand from movie goers ahead of what seems like a very strong film slate for this summer and through the holiday season,” said Tuna Amobi, a stock analyst with CFRA Research, in a May 26 report published before last weekend’s box-office results.

But with “Hollywood studios now looking to their own streaming platforms, we think AMC faces a steep uphill climb on the recovery path to a likely new normal that could compromise the theatrical window.”

You can follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey and subscribe to our free Daily Money newsletter here for personal finance tips and business news every Monday through Friday morning.

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