Is AMC Stock A Buy? Here's What Fundamentals, Stock Chart Action, Mutual Fund Ownership Metrics Say
01:01 PM ET 05/24/2021
Going to the movies is exciting. But can it match the action by AMC Entertainment (AMC)? Starting the year at just 2 a share, AMC stock skyrocketed 10-fold by the final days of January.
On Monday, shares rallied despite news on Friday that its heretofore largest shareholder, China's Wanda Group, has sold most of its remaining shares in AMC.
Peaking at 20.36 on Jan. 27, shares in the movie theater chain soared more than 940% from its coronavirus bear market low of 1.95 back in March of 2020 and from its 2021 low of 1.91. And the stock on Tuesday chalked up an eighth straight gain, following Monday's 7% blast higher in above-average volume.
Earlier this year, WallStreetBets chat-room traders on Reddit joined in unison in buying shares and bullish call options in AMC stock. They did the same in a band of other companies that had been heavily sold short and struggling. If you were watching or trading GameStop (GME), you likely were also keeping close tabs on AMC Entertainment.
When a stock shows a high level of short interest and is getting bid up, you can almost count on a chain reaction of buying to occur. Why? Short sellers, betting on a decline in the stock, often have to do an about-face. They cover their short position by buying back shares.
According to data analyzed by MarketSmith, the amount of short interest — or shares sold short by individual and professional investors — has jumped 10% in recent weeks to 1.2 times AMC stock's daily average volume of 74.4 million shares, or roughly 89 million shares. That's equivalent to almost 20% of the stock's entire float — huge.
In a nutshell, short sellers are still betting big on a future decline.
Yet since late January, AMC stock has followed an extreme zigzag path.
Just two weeks after that 20.36 peak, AMC crashed. Shares fell to as low as 5.26. Then came a huge second wave of buying, sending shares back in the low teens.
Week to week, the midcap stock (with a market value of $6.1 billion, 450 million shares outstanding and a float of 441 million) has lately seen its overall price range narrow. That's good — a new base is forming.
So, is AMC stock a buy now?
This story examines the fundamental, technical and fund ownership factors to determine if the Leawood, Kan., company scores a good probability of making money for stock traders.
Will AMC Stock Rebound?
Without a doubt, investors long in AMC are betting on a turnaround in fortunes.
In 2020, AMC lost $16.15 a share. Over the past five quarters, the company's sales have shrunk 22% to as much as 99% vs. year-ago levels. Such results would normally devastate most companies.
But as movie theaters open across the country and boost seating capacity, Wall Street is banking on a tremendous rebound in the top line.
Analysts polled by FactSet offer a consensus estimate of $378.3 million in second-quarter sales, up 1,900% from a minuscule $18.9 million in the year-ago quarter. Then they see sales rising an additional 562% in Q3 to $791.6 million and 574% in Q4 to $1.1 billion.
Wall Street expects net losses of $3.40 a share for 2021, a far cry from the unadjusted $39.15 it lost last year. And the Street sees net losses shrinking further in 2022, to $1.01 a share.
With big sales expected to arrive, you can expect cash flows to greatly improve.
On May 13, AMC announced it completed an at-the-market equity program launched on April 29. The company raised $428 million in capital before fees at an average price of $9.94 per share.
Key IBD Ratings
The last time AMC paid a dividend came on March 23, 2020, at 3 cents per common share. If the company were to resume this cash payout, shareholders could attain an annualized 0.9% yield at the current price near 14 a share.
For now, AMC scores poorly in IBD's proprietary ratings. Headed into Monday's trading, they include a 23 Earnings Per Share Rating on a scale of 1 to 99; an E for Sales + Profit Margins + Return on Equity (SMR) Rating; and a 55 Composite Rating on a scale of 1 (wizened) to 99 (wizardly).
Meanwhile, AMC's movies industry group ranks in the top half of IBD's 197 industry groups in terms of six-month relative performance. Decent, but not outstanding. Mutual funds owning a stake in AMC rose to 202 at the end of March vs. 187 in Q4 of 2020. Some portfolio managers are eager to accumulate shares.
AMC Stock Forecast
When choosing growth stocks for the biggest potential gains based on the CAN SLIM investment paradigm, your chances of finding a true market leader improve when you focus on those with a Composite Rating of 90 or higher. Shooting for a 95 or higher, particularly at the start of a new bull market, is even better.
However, given that AMC stock is a turnaround play, it makes sense to place more emphasis on relative strength. AMC has that in spades.
A 98 Relative Strength Rating on a scale of 1 to 99 means that the company has outperformed 98% of all stocks in the IBD database. Strong long-term performance? Indeed.
Plus, notice on the weekly chart and in MarketSmith, how the relative strength line has been vaulting.
The RS line, drawn in blue, compares a stock or ETF's moves vs. the S&P 500.
When a stock breaks out of a new base, prefer to see the RS line also running to new high ground. This strongly suggests that a stock is now outperforming the general market.
At this point, AMC has created a boxy cup-like base over the past eight weeks. That's plenty of time for a solid cup pattern to form. This pattern produces a proper buy point of 10 cents above the cup's left-side peak. So in AMC stock's case, the correct entry stands at 14.64. You want to see heavy volume on the breakout.
Conclusion: Is It A Buy Now?
So while AMC stock is up big this week, it has to surpass 14.64 before becoming a new buy. The attempt on May 18 was short-lived.
At this point, will AMC form a cup with handle?
Also, remember to control your risk. Not all breakouts work, especially when the stock market uptrend is under pressure. The best time to buy? When IBD notes the market in a confirmed uptrend, it signifies that buying demand is healthy among institutional investors.
In stock investing, you certainly want the wind at your back, not in your face.
And after you buy any stock with solid prospects, don't forget the golden rule of investing. Keeping your losses small keeps you in the investing game for the long haul.
Please follow Chung on Twitter: @saitochung and @IBD_DChung