The Greatest Show On Earth

Date: 7/17/2022
Author: Mr. X

Yes, they are really doing it again.

As of this writing, AMC Entertainment (AMC) is down close to 50% over the last year. In June 2021, it was close to $60 a share. Now, it is less than $17 a share. “Apes,” those who bought into the meme stock frenzy during the height of the pandemic retail trading boom, may have lost everything if they really believed the Mother Of All Shorts was on the way. Traders counting on a massive “short squeeze” have fallen back on complicated explanations and conspiracy theories to explain why the most outlandish predictions didn’t pan out.

How extreme were these predictions? Some thought AMC was going to hit $100 or even $1,000 a share because the system itself was going to be delegitimized. They even expected AMC surging to three-digits or even four-digit prices (yes, I’ve seen people arguing for this).

That didn’t happen, but AMC has been having a comeback over the last month. It’s up close to 30%. And shorts, one in particular, really brought it on themselves.

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Clifford Asness of AQR Capital Management stated that he had short positions in AMC in late June, calling the stock “super expensive, super unprofitable, super high beta, and volatile[e].” He then may have brought destruction on himself by saying, “I dare all the meme stock maniacs to try to hurt us.”

Financial populism has fallen far from the days when traders were rising in righteous anger against Robinhood and other apps for allegedly freezing trades while they were trying to sell profitable positions on GameStop (GME).

The market has declined considerably since the height of the pandemic and the retail trading boom, if not quite over, has matured. With America increasingly looking like it is on the brink of a recession and no new stimulus checks forthcoming, traders simply do not have the money for risky maneuvers. Some “apes” are surely out there staying true to the faith, but the mass audience has declined.

That said, AMC may be getting a bit of a rally because of fundamentals. Theaters are raking in impressive returns because of a series of box-office hits, including Top Gun: Maverick, Jurassic World Dominion, and the latest epic in the Marvel Cinematic Universe, Thor: Love and Thunder. One might think that Thor would be running out of steam, but this installment reportedly had the biggest return of anything in the franchise.

There is an element of pent-up demand here, as theatergoers are eager to return to the collective experience of watching movies now that the pandemic has ended. While there is a danger of renewed lockdowns as COVID-19 strains continue to spread, it’s doubtful the political will is there for the kind of economic shutdowns we saw in 2020.

CEO Adam Aron is perhaps the most effective corporate leader when it comes to promoting his company as a stock. He has repeatedly cheered on the “apes,” strategically positioning his company as a way for the common man to get one over on economic elites. He’s mused about providing special benefits to shareholders – a tactic that more companies should consider adopting in order to encourage long-term investment. He’s embraced crypto wholeheartedly… which was a good move when it was still worth something.

And of course, there’s the either insane – or brilliant – move that’s generating growth right now.

In March, AMC took a 22% stake in Hycroft Mining (HYMC), paying just shy of $28 million. Incredibly, Aron argued that AMC was well suited to move into mining because of its experience in “guiding a company with otherwise valuable assets through a time of severe liquidity challenge, the raising of capital, and the strengthening of balance sheets, as well as communicating with individual retail investors.”

From a “meme” perspective, the move made sense. As inflation becomes the most prominent political issue and countries around the world look for alternatives to the dollar, many think the time has come for precious metals. In a time of economic crisis, the promise of “real” money seems daring and authentic in a world run by experts who seem to be failing.

However, back in reality, none of this is true. The dollar is arguably stronger than ever, now reaching parity with the euro. The yen is in full retreat. American-led sanctions have failed to break the ruble, but that has only been able to keep its value due to massive government support – and it’s not much good when it comes to buying anything in the West anyway.

As for gold and silver, gold is now threatening to fall below $1,700 an ounce, and silver is well below $19.00 an ounce. Over the last few months, Federal Reserve notes have been a far more stable bet than so-called “real” money. And if you think meme potential is enough to sustain an investment, I have an NFT to sell you.

However, that may not always remain true. Hycroft, supported by new capital, is now launching a massive exploration program for the first time since 2014. It’s using a new approach that promises greater efficiency, and tens of thousands of acres that have not yet been explored could potentially provide new gains. Hycroft too has been the subject of new short interest… which could be sparking its own counter-reaction from retail investors looking to get one over on the “hedgies.”

All that said, as our late friend Dr. Kent Moors warned investors, ordinary traders can’t beat the hedge funds, largely because those who rail against “hedgies” are fighting a straw man. Some funds may be losing money if AMC and Hycroft beat the odds, but others will gain. It’s naïve to think that firms aren’t above taking advantage of or even sponsoring online-driven trader populism.

There’s also the awkward reality that AMC is heavily in debt and even with the recent spike in revenue, is probably not making money. AMC will report earnings on August 4 after market close and the consensus is for a loss of 20 cents a share on revenue of $1.18 billion. That can’t be sustained with a debt load this heavy, nor can excitement over mining investments keep the stock going long-term.

Yet what about short-term? It would be a risky play, but there is a possibility that strong box-office returns will allow AMC to beat earnings expectations and restart a meme stock rally. Investors who want to take this chance should be fully aware that they are participating in what is essentially a marketing exercise, not something that is likely sustainable for the long-term. There’s also the possibility of a takeover, as Amazon (AMZN) was rumored to be exploring a buy. While these rumors have never panned out, another speculative frenzy could be sparked by an earnings beat.

AMC will not be in the RID Model Portfolio in the next few days, nor should investors seeking a stable investment join the ranks of the “apes.” Biotech holds more potential for huge gains in this difficult market. However, those who are buying and holding are not being entirely irrational. The strong possibility of an earnings beat, the possibility of a buyout, and positive reports from AMC’s new mining project all provide potential for growth.

There’s also something to be said for Adam Aron’s leadership during this time. He’s playing a weak hand extremely well. Some may criticize him for public relations stunts rather than focusing on the core business. However, the last few weeks seem to show that the core business may be recovering, and may even be getting stronger than ever. This is no Enron, where glitzy marketing hides the vacuum at the heart of the company. AMC is trying to build its real assets while giving retail investors a stake in its company. I don’t think it will be enough to stave off the reckoning that will come with AMC’s mountain of debt. That said, while I wouldn’t buy AMC at this price… it is even more reckless to short it.

There are plenty of opportunities out there. You don’t need to mess with the apes.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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