Wall Street witnessed another short-squeeze on Wednesday, with AMC jumping over 19%, but as the economy reopens, is the cinema stock a buy?
On Wednesday, shares of AMC Entertainment (NYSE: AMC) soared to their highest levels in months as the stock was caught up in yet another short-squeeze. Fellow Reddit-favorite GameStop also saw its stock surge with some experts saying the recent rally has forced hedge funds to unwind their bets against the company to cover their short sale position.
But, before we get into what happened with AMC this week…
…what exactly does short selling mean?
Short selling involves borrowing the shares of a given stock that a person believes is going to decrease in value in the future. That person will then sell these borrowed shares to investors who are willing to pay the stock’s current share price.
Short sellers expected AMC stock to drop due to cinemas closing. So when retail investors drove the stock price up over the last few months, many hedge funds lost money.
Why is AMC stock rising?
Yesterday, AMC stock jumped more than 19% to $19.56, its highest since the end of January, while GameStop shares surged 15.8% to $242.56. AMC stock, and other companies popular on Reddit’s WallStreetBets, have been rising over the past few weeks but the real rally took off on Wednesday. Over the past 3 days, AMC has surged 95%.
At the time of writing, the stock has jumped 18% today.
Experts predict roughly 20.6% of AMC shares are sold short. Even though the stock has been rallying, short-sellers have been selling around 1.18 million shares short over the last week. Reports suggest that short-sellers have lost an estimated $1.37 billion over the past 12 months betting against AMC stock, $290 million of which was lost in Wednesday’s rally alone. AMC stock has risen 822% year-to-date.
Is AMC stock a buy?
Retail investors backing the stock have had positives for AMC as a business. Analysts have pointed out that the rise in share price has helped the cinema group survive liquidation by increasing the company’s capital. As vaccines continue to be administered throughout the U.S. and physical theatres are reopening, the company should be on its way to improving its financial position.
However, AMC is still considered a risky investment due to the high volatility of the stock. The rise in AMC’s share price is heavily linked to retail investors wanting to ‘stick it’ to hedge funds so they lose their money, which is not exactly the winning investment thesis long-term investors should be looking out for.
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