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AMC and APE: Look Out for These 3 Key Near-Term Catalysts

The coming days should be eventful for AMC and APE investors. Here are three things that may influence AMC's trading performance in the near term.
  • AMC Preferred Equity (APE) shares were created with the primary purpose of helping AMC raise capital and generate liquidity.
  • Thanks to the possibility of a sizable APE sale, AMC shares may become even more diluted.
  • Considering weakness in the movie theater industry in Q3 and the impact of potential stock dilution, short selling should increase in AMC in the near term.
Figure 1: AMC and APE: Look Out for These 3 Key Near-Term Catalysts

Figure 1: AMC and APE: Look Out for These 3 Key Near-Term Catalysts

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Will AMC Sell APE Shares?

AMC Entertainment  (AMC) - Get Free Report created the AMC Preferred Equity (APE) shares to help the company raise capital to pay down its $12 billion debt load and generate liquidity.

APE shares seek to strengthen AMC's business in such a way that shareholder sentiment is little affected by stock dilution. The only way dilution could occur would be if APEs were converted into AMC common stock or if more APEs were issued.

Truth be told, AMC's business is the healthiest it's been since the pandemic. But it still has a way to go before it is considered a stable and profitable business. Even with liquidity over $1 billion, AMC reported net losses of $450 million last quarter.

Much of AMC's recovery since the peak of the pandemic has been driven largely by cash raised through equity issues, and not necessarily by cash from operations.

Between 2020 and 2021, AMC's at-the-market offering program raised over half-a-billion dollars by selling new shares. This cash was key for the company to pay its debt, strengthen its liquidity position, and even go on the offensive by investing in the infrastructure of its movie theaters and in other businesses — such Hycroft Mining  (HYMC) - Get Free Report.

Now, rumors say that AMC is planning to sell 425 million APE units, with Citigroup  (C) - Get Free Report reportedly being the underwriter. That news caused a 15% drop in AMC shares during the trading session on September 27. APE jumped as much as 20% during the same trading session but still ended up 8% higher.

AMC's management stated during this year's shareholder meeting that the company would not dilute its common stock anymore this year. According to The Wall Street Journal, AMC "can't issue more common stock because it has already issued so many shares that it is facing the limit under its corporate charter."

However, recent bearish news regarding the movie theater industry may have been responsible for AMC's decision to bring forward the sale of the APE units. Cineworld (CNWGQ) — the world's second-largest movie theater chain — is filing for bankruptcy.

CEO Adam Aron commented on Cineworld's situation in a statement, saying that the film slate for AMC in the third quarter of 2022 is expected to be relatively weak. But he remains optimistic about demand in the fourth quarter and 2023.

How AMC Investors May Digest Another Dilution

Generally, stock dilutions tend to have a negative effect on a company's share price simply because they reduce the percentage of ownership of the current shareholders.

However, due to the number of retail investors betting in AMC's favor, dilutions of AMC shares have not caused a downturn since late 2021.

On the contrary, in all periods in which a stock dilution occurred — January and June 2021 — AMC's share price soared. It was only after the equity offering plan was finalized that AMC lost momentum.

AMC's meme-stock history may indicate that perhaps an APE dilution might not have a negative effect. However, this time the momentum surrounding AMC is quite different from what we saw last year.

In the current bear market, with imminent recession risks, supporting a stock dilution without affecting the stock price should be very challenging.

More Short Selling to Come

Before the pandemic, AMC stock was already a high short-selling target due to investor skepticism regarding the future of the movie theater industry. Naturally, as the pandemic started, bearishness gained momentum around AMC.

It was at this point that retail investors "embraced" the stock, leading short sellers to lose millions on their bets against AMC throughout 2021.

AMC shares have been in free fall this year, and short sellers have been recovering their losses from 2021. This year alone, AMC stock is down almost 75%.

The latest short interest data from AMC's stock indicates that about 20% of the float is shorted. With the prospects of a weak third quarter for the box office and the eventual sizable sale of APE units signaling more dilution to come, it is likely that short sellers will load up on even more positions.

AMC differs from the other thousands of common stocks because it is majority owned by retail investors who are willing to beat short sellers and expose stock market irregularities.

Thus, short sellers looking to calibrate their positions against AMC are playing with fire, given the history of short squeezes and volatility that the stock has built up over the past 18 months.

(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 Wall Street Memes)