Could it be possible that a company with $11 billion in debt that saw its business model crushed by the COVID-19 pandemic might not be the best place to put your money?
That’s the position being taken by a growing number of short-sellers when it comes to movie theater operator AMC Entertainment Holdings. But with the stock having skyrocketed this week, retail investors seem to fighting back — again.
AMC, like video game retailer GameStop, was one of the struggling companies to see its share price explode as “meme stock” investing — basing stock purchases largely on internet hype rather than a company’s long-term prospects to generate extreme, and extremely bewildering, short-term returns — became a nationwide phenomenon.
The air had been steadily rushing out of the meme investing bubble over the past few months. But on Tuesday, AMC and GameStop spiked 20% and 28%, respectively, suggesting that the short-squeeze trade on meme stocks is back on.
One of the more famous short-sellers taking aim at AMC, in particular, is Jim Chanos, founder of Kynikos Associates.
Here’s a little background on Chanos and why he and other short-sellers are once again setting their sights on AMC.
Why should I care what Jim Chanos thinks?
As the head of Kynikos — Greek for “cynical”, a telling detail — Chanos has been investigating firms for instances of fraud, unprofitability and overvaluation, and opportunities to short their stock, since 1985, when he launched the company with $16 million.
He’s done alright since then: Chanos’ net worth is currently estimated to be in the neighborhood of $2 billion.
Chanos had previously taken a short position against disgraced energy giant Enron — 16 months before it filed for bankruptcy — and alleges that accounting trickery is the only thing holding up the stock price of technology giant IBM.
Chanos had also successfully shorted rental car provider Hertz prior to the company’s filing for bankruptcy.
But he’s had a few notable misses as well.
In 2009 and 2010, Chanos famously forecasted crashes for both China’s economy and its housing market, neither of which have materialized. His long-running short position against Tesla — which Chanos only reduced recently — was more or less a colossal backfire, with the company’s stock rising by more than 1,800% in the five years after Chanos announced he was shorting the company in May of 2016.
But Chanos’ case against AMC seems to make sense.
Why AMC and other meme stocks could be in for a rough ride
Why would AMC’s stock increase from $2 per share in January to an all-time high of $62.55 six months later if its theaters were mostly closed and some of America’s most influential production companies had already begun releasing their biggest movies digitally for at-home consumption?
If that’s a question that has crossed your mind as an investor, you and Chanos have something in common.
In an interview with CNBC earlier this month, Chanos pointed out that AMC’s revenue for the second quarter of 2021 was down 70% compared to the second quarter of 2019, the last Q2 period American moviegoers were actually allowed outside.
“The reality is that things have gotten worse at this company,” Chanos told CNBC earlier this month. “So clearly something has changed. And that change is streaming.”
London-based hedge fund Odey, which manages about $4 billion, announced that it was also betting against AMC. In a letter to investors, Odey wrote that the influence of retail investors has caused both “major disruptions” and “compelling short-term opportunities” in the market.
The valuation metrics seem to support Chanos’ and Odey’s skepticism over AMC.
From 2015 to 2020 — prior to the meme stock mania — AMC traded at an average price of roughly 0.5 times sales. Today, AMC trades at an extremely lofty 14 times sales, meaning that the stock would have to crater about 95% just to get back to pre-pandemic price-to-sales multiples.
A sign of things to come?
Of course, overvaluation isn’t solely a meme stock phenomenon.
The Dow and the S&P 500 continue to flirt with record highs amid high levels of inflation and rising Delta variant COVID cases, prompting a growing number of warnings from experts that a significant market correction could be looming.
In his CNBC interview, Chanos explained that novice retail investors, many of whom helped inflate the value of companies like AMC and GameStop, are typically unprepared for such a market correction.
“The problem with getting more people, retail, involved is that it always seems to happen toward the end of every cycle,” Chanos said, adding that retail investors didn’t buy on the dip when the market bottomed out in 2009 following the financial crisis, or in 2002 after the dot-com bubble popped.
“So the problem in the last few cycles, as I see it, is that we get promoters and insiders and people who have done very well cashing out as retail is buying,” Chanos said.
The play going forward
Picking individual stocks or forecasting what the market will do is a game that few investors can play well.
Instead of trying to predict the future, prepare your portfolio for anything by building one that’s as diversified as possible. By spreading your bets out, you won’t leave yourself vulnerable to any one particular asset class or meme stock.
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Stocks and ETFs. You’re not going to make much money without a little volatility, so make sure you still have exposure to the stock market. Popular trading apps can get you started pretty easily, and by signing up you’ll be entered into a draw to win a share in a major company, like Apple. Another app allows you to invest in a diversified portfolio of stocks using little more than the “spare change” leftover from your everyday purchases.
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Cryptocurrency. If you have the appetite (and financial breathing room) for the risk associated with cryptocurrencies like Bitcoin, betting on their upside could pay off handsomely. Crypto is still largely a speculative play that most of the world doesn’t understand, so proceed with caution.
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Farmland. If you have a little more capital to work with, farmland is an enticing option as it generates above-average returns through both rising land and commodity prices. Getting exposure to farmland used to be a headache, but a new app is making this overlooked asset easier than ever to invest in.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
