The Reddit crowd is at it again…
As I explained back in February, a group of day traders is coordinating on the chat board site Reddit to drive up share prices of some of the weakest companies that trade on the stock market.
The day traders’ goal is to inflict pain on hedge funds that have shorted these struggling businesses. We saw their dirty work with GameStop (NYSE: GME) earlier this year.
My advice to long-term investors is to stay away from the stocks that the Reddit gang is focusing on.
This will end badly for anyone who buys and holds shares of these companies at inflated prices.
Case in point… AMC Entertainment Holdings (NYSE: AMC) is a disaster waiting to happen.
Founded in 1920 and today boasting almost 1,000 theaters, AMC is the largest movie theater chain in the world.
As you can imagine, the COVID-19 pandemic has been bad for business.
To be honest, though, AMC’s business wasn’t exactly booming before the pandemic arrived.
Netflix, Amazon Prime Video, Disney+ and all of the other at-home streaming options were already biting into AMC’s cash flows before COVID-19 was an issue.
The company’s balance sheet, bloated with $4.7 billion of long-term debt, wasn’t anything close to pristine prior to the pandemic either.
That made 2020 a nightmare for AMC.
The company’s annual cash flow from operations over the past three years was $523 million in 2018, $579 million in 2019 and negative $1.1 billion in 2020.
AMC’s operations not only didn’t make any money in 2020 but also burned through $1.1 billion of cash.
AMC’s management team raced to raise cash so it could keep paying the bills.
It added another $1 billion of debt to an already heavily leveraged balance sheet…
Then, shareholders were massively diluted. The company issued an astounding number of new shares to raise more cash.
Desperate times call for desperate measures…
Faced with revenues that fell from $5.4 billion prior to the pandemic to just $1.2 billion last year, AMC’s management didn’t have many options.
But there are consequences to these desperate actions…
The increased debt load that the company now carries means AMC’s estimated annual interest expense is running at roughly $600 million.
That is more than double the $300 million of interest the company was paying pre-pandemic.
Given that AMC’s business was generating only $500 million of cash flow from operations going into the pandemic, I’m highly skeptical that the company can handle this elevated interest burden.
The company apparently shares my concerns, and so do its lenders.
In its recently filed quarterly financials, AMC included a note that indicated it was in violation of financial covenants required by its lenders.
For now, the lenders have allowed for a temporary waiver of those covenants.
It is never good when you are living solely on the kindness of your bankers.
Those quarterly financials also included a note that indicated that for AMC not to default on future interest and rent payments, attendance levels need to rebound to 85% of pre-COVID-19 levels by the fourth quarter of this year.
There is a long way to go given that, in the first quarter, attendance was at just 12%.
A rebound in attendance is possible, but that would only mean that AMC would be making just enough money to pay its bills.
Because a company is barely surviving is hardly a reason to own its stock.
Despite that, thanks to the Reddit crowd, AMC’s stock market valuation has soared higher than ever before…
Going into 2020 before COVID-19 was a concern, AMC Entertainment had a stock market capitalization of $750 million.
Today, with the company hemorrhaging cash, bloated with debt, showing movies to sparsely attended theatres and facing even tougher competition from Disney+, Netflix and Amazon Prime Video…
AMC Entertainment’s stock market capitalization is now $10 billion.
That is an eightfold increase despite the fact that the company now faces a very real chance of bankruptcy.
It is also an absurd valuation for a company that is barely going to be profitable in the best-case scenario.
Stay away from this stock, folks. Stay far away. Some day traders may be able to make money, but long-term shareholders will get burned.
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