Stocks to sell

Look Out Below! How Far AMC Stock Could Drop.

Global movie theater chain AMC Entertainment (NYSE:AMC) made a splash in the financial headlines when it issued AMC’s Preferred Equity (NYSE:APE) shares. CEO Adam Aron seems to enjoy attracting attention and rallying the troops (or apes) with stunts like this. However, it’s all a distraction from the company’s fiscal problems, so it’s wise to just avoid AMC stock altogether.

When stock prices become divorced from a company’s fundamentals, watch out. Sooner or later, the market’s “weighing machine” will align share values with corporate profitability, or lack thereof. It’s only a matter of time before reality sets in, but dislocations can persist for a while.

In the case of AMC Entertainment, it feels like Aron and the meme-stock crowd are actively encouraging these market dislocations. Issuing preferred equity shares might get the meme-sters riled up, but AMC Entertainment can’t withstand the weight of failing financials forever.

AMC Stock Holders Get a ‘Dividend’

Famously, on Aug. 22, AMC Entertainment debuted its APE Preferred Equity Units. These were provided as a special “dividend” for existing AMC Entertainment investors. It’s a somewhat non-traditional definition of a dividend, though.

Basically, current investors received one APE unit for each share of AMC stock they already owned. It makes sense, then, that the AMC Entertainment share price fell, since the investors gained back some value by receiving the APE shares.

Wedbush analyst Alicia Reese pointed out, however, that the event didn’t seem to benefit the investors: “At the end of APE’s first day of trading, the combined shares value from Friday’s closing price of $18.01, with AMC ending the day at $10.46 and APE at $6.00.”

AMC Stock Gets a Deep Downgrade

Reese evidently isn’t bullish on AMC stock. She maintained an “underperform” rating on the shares and reduced her price target from $4 to $2.

Noting an apparent share price dislocation, Reese stated, “While it makes little sense for APE to trade below AMC, we think that it reflects concerns over impending dilution.” Reportedly, AMC Entertainment is already authorized to issue up to 4.5 billion additional APE Preferred Equity Units.

Hence, the company’s preferred share issuance could help AMC Entertainment raise cash, but the share dilution concern is valid. In any event, investors shouldn’t allow this attention-getting stunt to distract them from AMC Entertainment’s financial problems.

What problems? For one thing, AMC Entertainment carries the heavy weight of $9.5 billion in net debt. Furthermore, the company admitted that its current cash burn rate is “not sustainable.” Additionally, AMC Entertainment is unprofitable, with a $121.6 million net earnings loss during the three months ended June 30, 2022.

What You Can Do Now

You might hear about other stunts/distractions, such as National Cinema Day, in which movie theater tickets were discounted to $3 apiece. Events like these can’t cover up AMC Entertainment’s financial potholes.

If you’re a quick-turnaround trader of AMC stock, that’s perfectly fine. As a long-term investor, however, consider that Reese’s $2 price target isn’t unrealistic. Her “underperform” rating, moreover, should serve as a warning. That warning is: Get out before it’s too late.

On the date of publication, David Moadel 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.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.