What happened
Shares of movie theater operator AMC Entertainment (NYSE:AMC) rose 14% when the market opened on Feb. 3. But by around 11 a.m. EST the stock had lost about half that gain. This hints that the Reddit message board behind its earlier run-up may not hold the same sway it once did over the stock price.
So what
Along with GameStop, AMC Entertainment was one of the main poster children for the short squeeze craze that took shape over the last week or so. At one point, in fact, AMC’s price had risen almost 840% for the year, an incredible figure given that not too long ago the company was warning that it might run out of cash. While it has managed to solve that issue, for now, it still has the headwinds of the coronavirus to deal with, so the fundamentals remain pretty ugly.
Image source: Getty Images.
Which is why there was a huge short position in the stock for the Reddit board to target with a short squeeze. The thing is, short squeezes don’t last forever, and eventually fundamentals matter again. And the stock is now down more than 50% from its late-January peak. Only some Reddit board readers don’t seem to be willing to give up, even though the upward momentum here appears to have passed. Thus the share price remains volatile.
Now what
Long-term investors should avoid AMC Entertainment stock. Even without the short squeeze this was a highly risky investment. With the short squeeze there are just too many unpredictable variables to call this an investment right now — what’s going on is pure emotion-driven speculation. That said, there are lessons to be learned here if you step back and consider the bigger picture. On that score, the incredible rise and fall in AMC Entertainment’s stock price should stand as a warning that following a crowd can be very dangerous to your finances. Indeed, the ugly truth is there was an investor who bought the stock when it was up over 800%, likely hoping it would keep skyrocketing.
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