Short by Chanos tanks AMC share price

A recent comment by famed short-seller Jim Chanos (pictured above) running down the AMC Entertainment [AMC] stock is drawing a lot of attention at a time when the share is leading the so-called ‘meme mania’ in the markets.

Not only has the AMC share price has grown more than six times to $35.69 on 16 August from $5.60 a year ago, but the company surpassed market expectations in the recent earnings call on 9 August, which was also spiced by the announcement of plans to accept cryptocurrency and team up with another meme stock, GameStop.

Days after the call, the stock slipped 2.35%  between 9 August and 13 August to $33.80. Enthusiastic investors and Reddit retail traders shrugged the loss after having driven the stock from the 52-week low of $1.91 on 5 January to the high point of $72.62 on 2 June. These investors and retail traders active on social media expect the stock to recover its 52-week high level in the coming months.

Fundamental question

Chanos’s comments reflected a growing sense of irritation among a section of investors who cannot accept that a stock with weak fundamentals can fly high. The stock represents brick and mortar cinema houses which have suffered heavily during the COVID-19 pandemic and continue to battle with the digitalised entertainment market.

“In that case, AMC revenues were down 70% in the second quarter, versus the second quarter of 2019. Their ticket sales were down 75%” - famed short-seller Jim Chanos

“The reality is that things have gotten worse at this company since the depths of the pandemic,” Chanos said in an interview on CNBC. “So clearly… something has changed, and I think that change is streaming.” His firm, Kynikos Associates, has a small put position in AMC representing less than 1% of its assets, Chanos said.

Comparing the second-quarter earnings with the same quarter in 2019 before the pandemic struck, the short seller said: “In that case, AMC revenues were down 70% in the second quarter, versus the second quarter of 2019. Their ticket sales were down 75%.”

AMC’s strong suit is its surplus cash position, partly garnered by selling a portion of its stock.

While announcing the 2021 second-quarter results, the company’s chairman and CEO Adam Aron said: “In Q2, mostly May and June, we raised another $1.25bn of fresh equity capital and our cash burn was meaningfully less than we had previously experienced in recent past quarters. So we ended Q2 with some $2bn of liquidity.” AMC's theatre-level cash flows will turn positive in Q, he added.

“In Q2, mostly May and June, we raised another $1.25bn of fresh equity capital and our cash burn was meaningfully less than we had previously experienced in recent past quarters. So we ended Q2 with some $2bn of liquidity” - CEO Adam Aron

Railing against the nihilists

The Kynikos Associates founder lambasted all enthusiastic backers of meme stocks and not just AMC.

Chanos decried the sentiment from some buyers who complain. ' Well, yeah, the game would appear to be rigged against you if you keep coming in and buying things at 10 times what they're worth," he exclaimed in the interview.

Chanos’s bleak view on AMC’s share price is also shared by analysts on Yahoo Finance. The views forecast AMC’s loss per share of $0.91 in the current quarter adding to $2.89 for the full year 2021.  It is estimated to reduce to loss of $0.73 next year.

James Goss from Barrington reiterated a ‘hold’ rating on AMC after the company’s shares closed on 9 August at $33.80.

A total of 52 exchange-traded funds (ETFs) own AMC stocks worth $32.1 million, according to etf.com. ETFs holding big chunks of its shares are iShares Russell 2000 ETF with 9.18 million shares, iShares Russell 2000 Value ETF with 4.40 million shares and Vanguard Mid-Cap ETF with 3.54 million shares.

ETFs that have allocated a significant portion of their portfolio to this meme stock are SoFi Social 50 ETF with 5.41% and Invesco DWA Consumer Cyclicals Momentum ETF with 3.15%.