A Warning to Investors
“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.” Not exactly the words that you want to hear come from the CEO of a publicly traded company. Yet, that is a quote from a regulatory filing that AMC Entertainment (NASDAQ: AMC) placed with the SEC on June 3rd, 2021. The filing went on to say, “Within the last seven business days, the market price of our Class A common stock has fluctuated from an intra-day low of $12.18 on May 24, 2021 to an intra-day high of $72.62 on June 2, 2021, and we have made no disclosure regarding a change to our underlying business during that period, other than with respect to an additional financing.”
That same day AMC filed another disclosure with the SEC saying they planned on selling an additional $11.55 million shares of common stock (which ended up raising ~$600 million 2 days later).
Why would AMC warn investors about their inflated stock price but still issue more shares? Earlier that week on June 1st AMC sold 8.5 million shares to Mudrick Capital Management for $230,500,000. At the time AMC said they would use the proceeds for the “pursuit of value creating acquisitions of theatre assets and leases, as well as investments to enhance the consumer appeal of its theatres. In addition, with these funds, the Company intends to continue exploring deleveraging opportunities.” After the share value of AMC bounced on this news, Mudrick flipped their holdings and made upwards of $40 million for their one-day investment.
Clearly, the leadership of AMC doesn’t believe their stock is worth what investors are willing to pay for it. While all of the above was going on, AMC executives were dumping their own AMC stock, raking in over $8 million, and then did it again this week when AMC executives cashed in another $4 million of AMC stock.
Look at the Fundamentals
You would think that investors would connect the dots over the course of the week of June 1st. AMC CEO says its stock is overvalued. AMC executives cash out their own AMC stock. AMC issues millions of additional shares. Investment Management shop flips $230 million of AMC stock in one day.
The events of this week make it clear that retail investors purchasing shares of AMC don’t care about the fundamentals. AMC’s net income in 2020 was negative $4.59 billion and their liabilities at year end exceeded their assets by $2.86 billion. Why would an investor pay anything for a company that has a negative balance sheet? AMC was losing money before the pandemic. Why would anyone think AMC can turn it around post Covid?
Is this phenomenon being drive by millennials with extra money and Robinhood accounts playing the stock market like a roulette wheel? On June 9th, 2021 AMC disclosed that it has 4.1 million shareholders and 80% of the stock is owned by retail investors with an average holding of around 120 shares. This is unusual for a publicly traded company but not surprising for AMC. It seems that institutional / professional investors are not interested in taking a losing bet on AMC stock.
In order to have a profitable transaction from the purchase and sale of a share of stock, you have to find someone to buy the stock at a higher price than you purchased it for. Finding that person may be a difficult task for AMC shareholders when the current hype wears off.
Tune out the Noise
Daily market news and commentary about the latest investment fad or Meme stock can lead to fear of missing out (FOMO) and challenge your investment philosophy. The best course of action is to tune out the noise and invest in a globally diversified portfolio that aligns with your needs and risk tolerance. Stay the course for the long-term and you will be rewarded for your patience and discipline.
Jonathan Harrington, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.