The seeming inability of retail investors to permanently lift meme stocks bodes badly for AMC Entertainment (NYSE:AMC) stock. Meanwhile, the company’s rather unimpressive first-quarter results, along with its high valuation and huge debt load, also don’t look good for its outlook. In light of all of these points, I strongly urge investors to unload the shares.
Meme Stock Investors’ Power Is Rapidly Diminishing
In recent weeks, Roaring Kitty, the retail investor who helped launch the meme-stock boom in 2021, has tried on two occasions to bring back the magic. In May, he posted on social media for the first time in three years and unleashed a fairly large rally in many meme stocks, including AMC.
However, the rally didn’t last long and in 10 days the shares gave back the vast majority of their gains. AMC stock jumped from $2.91 on May 10 to a high of $11.88 but closed at $4.40 on May 17, not far above the high of $3.55 that reached on Apr. 23.
What’s more, Roaring Kitty’s powers appear to be diminishing. After he shared a post on Reddit on Jun. 2 seeming to show he had acquired 5 million shares of GME stock, many meme stocks rallied again. However, by the afternoon of that day, they had given up the lion’s share of their gains. AMC stock reached a high of $5.70 but sank to $4.82 by the time the market closed. While the latter price still represented a one-day gain of 11.5%, it’s clear the ability of meme stocks to hold a rally is waning.
As a result, I would not be surprised if the next meme surge (if there is one) consists of 5% to 10% gains that dissipate very quickly. Short-term investors who buy AMC stock at this point may very well get hit with the stock’s continued decline from its Jun. 3 gains. They won’t be able to make up the losses if and when the next meme-stock pop occurs.
Poor Fundamentals and Very High Debt
As I noted in a past column, I believe the three main reasons for the waning power of meme-stock investors are their reduced buying power, the likely plans institutional investors have made over the last three years to combat the phenomenon and the relentless public relations campaign against meme stocks by analysts. Taken together, these catalysts are likely to further reduce the power of meme-stock investors going forward.
In the first quarter, AMC’s top line dropped 0.3% versus the same period a year earlier. Ominously, the sales generated by its core North American box office business slumped 6% year-over-year. The metric provides strong evidence against the thesis that due to the success of a few films AMC was enjoying a huge comeback.
Over the longer term, AMC is likely to be badly hurt by its huge debt of over $2 billion. Most of that money is due in 2026. To have any chance of paying back the debt, the company only has two choices. It will either have to issue tremendous amounts of AMC stock or declare bankruptcy. Both scenarios are disastrous for shareholders.
The Bottom Line on AMC Stock
The meme-stock revival is weakening and could disintegrate altogether. Meanwhile, AMC’s fundamentals are poor and it will be badly hurt by its debt over the longer term. Cumulatively, all of these points make AMC stock a sell.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines