AMC Entertainment (NYSE: AMC) and GameStop stocks have skyrocketed once again, though they have started to level off. This volatility, while exciting, should be a signal for investors to remain calm and cautiously optimistic. In this environment, more people are likely to lose than gain.
What investors should know about meme stocks
The so-called "meme stocks," like AMC and GameStop, are called that because they have the potential to (and in these cases, did) go viral on social media, like a meme does. But these are stocks, not entertainment (which is how they're being treated). The reason AMC and GameStop in particular are seeing meteoric price gains are solely due to retail investors who have targeted these stocks via social media.
AMC stock shot up in early June, similar to what happened this past January when this phenomenon happened the first time. In this year alone, AMC's stocks went up nearly 3,000%. Investors naturally see this as a wow moment. But that should also tell investors they can get hurt financially by investing during this type of environment.
The potential to crush investors
Let's say you have a stock that's worth $2, which is what AMC stock was selling for in early January. By May, it was worth around $9, but then in June it shot to around $60 -- this massive jump happening in a matter of days, which rarely happens in the stock market, according to financial advisor and radio talk show host Wes Moss. Investors should pay attention: The reason behind this drastic jump has the potential to crush thousands of investors.
But the movie business is picking up
It makes sense that as people are returning to movie theaters after the pandemic the stock would go up; revenue during the pandemic went to zero and now AMC is back in business. But according to Moss, "AMC stock moved disproportionally relative to what the business is going to do." And that's the crux of these meme stocks.
AMC CEO warns investors
AMC, in a recent Securities and Exchange Commission (SEC) filing, discussed the extreme price changes of its stock, likening it more to the "passions of retail investors" than its actual business operations. In other words, it's the trading dynamics that's causing the stock price surge, not the actual business -- neither AMC's business in particular nor the entire movie industry's business.
Because there's nothing to base the stock surge on besides the whims of a particular social media crowd, there's no telling what could happen in the future. It's just a guessing game.
AMC, while doing better than it was last year at this time, is still carrying a heavy debt load. It now has some capital due to the inflated stock price. This is giving the company a new lifeline, helping it pay down some debt. But again, the cash infusion is not from the actual movie business; it's largely from Reddit's WallStreetBets forum.
Reddit's WallStreetBets forum is responsible for all this crazy stock activity, but they claim they're not causing market manipulation. They qualify this bizarre statement by redefining the term "manipulation."
To this group, market manipulation would be by lying about a business to entice buyers, saying for instance, that all AMC movies will now offer a virtual reality experience when that isn't true. The Reddit group says getting their entire group to push up a stock price isn't market manipulation. Why? Because they're doing so out in the open.
Just because this group engages in apparent doublespeak doesn't mean it's correct. They can say all they want, but as a business, AMC lost over $500 million during the first three months of 2021 and, in 2020, lost a gigantic $4.6 billion. What's going on with this huge AMC stock surge certainly looks like market manipulation.
The Millionacres bottom line
The cofounder of Reddit, Alexis Ohanian, calls trading apps like Robinhood, which many from the Reddit group use, "delightful," because they provide an easy way for people to buy and sell stocks. The AMC stock surge is all about community engagement and not so much about the substance of a company.
The big takeaway: These are trades, not long-term investments. The buyers are following the momentum of the stock instead of the business. AMC is giving free popcorn to shareholders. If you love popcorn, says Moss, maybe this stock is for you.