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3 Reasons Why AMC Stock May Bite Short Sellers in 2022

While AMC stock’s momentum slowed down in the latter half of 2021, allowing short sellers to recover some of their billion-dollar losses, we have listed three reasons that short sellers should be nervous heading into 2022.

In 2021, AMC Entertainment ( (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report) was the target of one of the largest short squeezes in history. Hedge funds were critical of the stock at the time, with many seeing the company as having weak fundamentals. Plus, AMC had suffered greatly from the COVID-related closures of its movie theaters.

However, many AMC shareholders who bought the stock at its pre-short levels and then held on through the squeeze have grown rich over the past year. With mega bullish retail shareholders behind it, AMC was able to raise money to get back on financial track.

Figure 1: AMC theater facade.

Figure 1: AMC theater facade.

Despite shares having come down almost 60% from their historical peak, short sellers are excited about an opportunity to continue reversing their 2021 losses. But they shouldn’t be so eager. Here, we have listed a few reasons why AMC may bring short sellers down in 2022.

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#1. “Apes” own the majority of AMC shares

The most recent data from Yahoo Finance says that AMC has a float of 513 million shares. Of that total, about 74% is owned by the public, 25% by institutions, and less than 1% by insiders ( directors, company employees, and those with access to company information before it becomes public). See the chart below:

Figure 2: AMC ownership.

Figure 2: AMC ownership.

Among the institutions, Vanguard and Blackrock are the top holders, holding 9% and 7% of the total shares, respectively. It is worth remembering that these companies turn their holdings into ETF shares, which in turn can (and usually do) end up being held by individual investors.

Until May of last year, AMC's largest shareholder was China's Dalian Wanda Group Co, which eventually sold 30.4 million of its shares acquired in 2012 for about $430 million, taking advantage of AMC's good momentum - that was just days before AMC shares rose from $14 to over $60.

After Wanda's big sale, AMC CEO Adam Aron disclosed that no entity held a stake of more than 10%.

A company whose ownership is widely distributed to the general public, as is the case with AMC, can benefit in a few ways. For example, AMC can implement or change company policy without necessarily having to be aligned with a handful of key shareholders first.

A dispersed ownership structure allows AMC the flexibility to make its strategic decisions with some independence - unless the management team chooses to consult more frequently with the broader base of individual investors, that is.

#2. It is extremely risky to bet against AMC

A November report from S3 Partners showed that short sellers betting against AMC collectively lost $3.44 billion over the past year. And that’s after short sellers were able to recoup some of their losses; the same report showed shorts had made about $20 million per day since mid-September 2021, when AMC’s decline began to intensify.

With AMC stock down more than 33% over the past two months, it is natural that the next report will show short sellers in an even better spot, but still, their road to recouping all their losses remains long.

As an extremely volatile stock, AMC presents a much greater risk to those betting against it than those betting for it, given the potential for unlimited losses for short sellers.

Also, AMC's volatility has exceeded 153% over a 52-week period. That is almost 10 times the volatility of the market as a whole. Even Tesla ( (TSLA) - Get Tesla Inc Report) has experienced volatility of "only" 69% this year.

Taking history as a guide, it is not unreasonable to expect AMC to rise 100% or even more, even though it also holds considerable risks of falling sharply.

#3. Short interest is still high, while positive sentiment prevails

High short interest can sometimes be deserved. It can provide a warning that fundamentals are heading in the wrong direction or that sentiment among investors is generally negative.

But a high short ratio can also prompt a short squeeze. That can occur when there’s a radical increase in trading volume, which may be caused by media exposure, retail excitement on online forums, or other factors. Even a moderate share price jump can put pressure on shorts, causing some of them to cover and driving prices further upwards.

AMC's recent short interest history suggests that its short levels remained elevated throughout 2021. Currently, AMC’s short interest is at its highest level since mid-September, when shares were hovering near the $50 mark. You can see the underlying Ortex data on the chart below.

Figure 3: AMC reported short interest history.

Figure 3: AMC reported short interest history.

Despite a brief slowdown of AMC stock’s popularity on Reddit, the "ape community" remains highly engaged. Possible stock market irregularities are routinely discussed, and AMC is still often one of the 10 most discussed stocks on Reddit.

Figure 4: Trending stocks on Reddit on January 6.

Figure 4: Trending stocks on Reddit on January 6.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)