On Wednesday, July 7, AMC stock (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report dipped as much as 14% right out of the gate, before recovering some of the losses later in the morning. After having reached a four-week peak of nearly $61 per share on June 17, AMC pulled back almost 30% in less than three weeks.
Wall Street Memes looks at price action and debates what traders and investors might consider doing next, in the face of weakness.
(Read more from Wall Street Memes: Can AMC Stock Reach $100,000 Per Share?)
AMC traders: keep this in mind
This should go without saying, but I will still emphasize: trading momentum stocks is a risky proposition. In my opinion, AMC traders on the long or short side should hope for the best, but always expect the worst – with longs having the benefit of limited downside exposure.
Having said this, put the recent pullback in perspective. A quick loss of nearly 30% would be painful to most – not to mention to options traders who, having taken the long side, may have already lost 100% of their original bets. But in the end, what has been happening to AMC is quite normal for a meme stock.
The two graphs below depict the year-to-date pullbacks from the peaks in AMC stock (left chart) and GME stock. Notice that the recent dip in AMC has been consistent with, and not even as bad as, some of the other corrections seen so far in 2021. In fact, both stocks corrected more than 70% at one point this year.
As a reminder, despite all the volatility and drawdowns, gains in AMC and GME are still above 900% in 2021. Most traders, unless they jumped in around late January or early June, are probably still in the green.
Now, will AMC stock rebound from this most recent selloff? This is a different question altogether. I wish I had a crystal ball to answer this one. While many seem confident that shares will reach or even surpass $100,000, the more important takeaway is that traders should expect a very wide range of outcomes here, from awful to “lunar”.
(Read more from Wall Street Memes: AMC Stock: Shorts Are Playing With Fire)
AMC investors: keep this in mind
When it comes to the investment case on AMC, my perspective is quite different from the above. Long-term investors tend to make “bets” based on business fundamentals and valuations, not momentum. For this type of market participant, the decline in AMC stock should be a reminder to not play with fire.
AMC is still facing quite a bit of headwinds, as the pandemic continues to wind down. According to Yahoo Finance, analysts do not expect the company to turn a net profit any time soon: net loss per share of $3.16 this year and $0.81 next year. On a 2022 forward basis, AMC stock trades at an aggressive price-to-sales ratio of five times.
In my opinion, the only feasible and (arguably) responsible strategy that might make sense for investors looking to put their meme FOMO to rest is to use a barbell approach: lots of “boring” holdings in their portfolios, sprinkled with very small bets in meme stocks – an approach that I discussed in more detail not long ago.
(Read more from Wall Street Memes: Brace For The Mother Of All Short Squeezes)
AMC stock has been having one bad day after the other. Is this the end of the mid-year rally for shares of the movie theater operator?
(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)