Stocks to sell

When It Comes to AMC Entertainment Stock, All Signs Still Point to Sell

While AMC Entertainment (NYSE:AMC) stock has been trending lower over the last few weeks,  it remains a meme stock king. Despite many warning signs that it’s set to experience a dramatic price drop, AMC stock is still up 1,500% in 2021. The huge gains have been mostly caused by the so-called “ape army” that makes up a large chunk of its shareholder base. And the army remains behind AMC.

Image of the entrance of an AMC Entertainment (AMC) branded theater. undervalued stocks

Source: Helen89 / Shutterstock.com

However, as I’ve said many times previously, the rally won’t last forever. At some point, even the stock’s boosters, who have held it since it first started trending on Reddit’s r/WallStreetBets subreddit and elsewhere, will start to take profits. Admittedly though, it’s hard to say exactly when this will occur.

Despite the latest round of uncertainty sparked by Covid-19’s Omicron variant, Reddit’s support for AMC hasn’t waned. The stock is still popular on r/WallStreetBets, although it no longer dominates the conversations there like it did last summer.

But just because  AMC stock has been resilient doesn’t mean that you should buy it today, based on the idea that it’s a safe haven, as one Redditor recently argued. The fact that the company won’t fully recover and that insiders are cynically unloading its shares may not matter to the “Ape army.”

There is, however, one thing that may push them to finally sell AMC stock.

AMC’s Outlook Remains Bleak

By and large, the status of AMC Entertainment hasn’t changed that much. With lockdowns long over, audiences have returned to its movie theaters. But as a Seeking Alpha commentator recently argued, movie theater attendance still hasn’t gotten back to its pre-pandemic high-water mark.

In fact, assuming that Covid-19 continues to affect day-to-day life and that streaming further erodes the appeal of going out to see movies, AMC may not ever fully recover. Instead, the company may only get back to 80%-85% of its pre-Covid attendance.

That will make it difficult for AMC to get out of the red. Nevertheless solid bear arguments like this continue to have little impact on its shares. The “apes” don’t seem too worried that AMC stock, at best, could wind up becoming a “zombie stock.”

Actually, AMC may be too weak to become a “zombie stock.”  Zombies at least can generate enough cash flow to service their debt. The movie theater chain, however, may raise more money through dilutive secondary offerings, assuming its pie-in-the-sky ideas like diversifying into crypto and popcorn fail to deliver.

But the Reddit crowd seems to buy the “meme safe haven” argument discussed above. This has played right into the hands of AMC’s insiders. CEO Adam Aron and other top executives have so far this year unloaded $70 million worth of shares. While all these warning signs have yet to compel the “diamond hands” crowd to hit “sell” on the AMC shares sitting in their Robinhood (NASDAQ:HOOD) accounts, this unique  group of investors may unload their shares soon.

What Could Cause AMC’s “Ape Army” to Finally Retreat

The underwhelming recovery of AMC and insiders selling its shares may not matter to this stock’s loyal investor base. But there’s still one thing that could compel them to finally retreat:  An undeniable end to the “easy money” environment created by the U.S. Federal Reserve.

Redditors continue to cite the “Fed printer go brrr” meme when it comes to shrugging off fear, uncertainty, and doubt about AMC and other meme stocks.

However, the latest batch of Fed meeting minutes show that hawkishness is growing among the board’s members. If this results in the central bank taking action sooner rather than later, it could cause a market-wide selloff. This, of course, could have some impact on AMC stock. Worse yet, the prospect of an end to the Fed’s dovish policies could be what finally tells the “Apes” that the party’s over.

In turn, the Redditors could finally make their exit, resulting in the shares finally moving to a price more in-line with sell-side price targets.

The Bottom Line

AMC continues to hold steady between $30 and $40 per share, as the “apes” care little about the first two warning signs that I highlighted above. But the Fed’s retreat could be what finally compels them to finally cash out.

AMC’s minimal potential gains fail to match its massive risk. As a result, investors should avoid AMC stock.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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