Do huge price moves always have to be based on company specific news catalysts? The action in AMC Entertainment (NYSE:AMC) is proving that the answer is no. AMC stock is flying even while the movie theater chain is struggling.
How fast is the stock moving? I’ll put it to you this way. The share-price trajectory is comparable to what we’re seeing in GameStop (NYSE:GME) stock, or even Bitcoin.
One can only wonder what a value-focused investor like Warren Buffett is thinking about the price action of AMC stock. Perhaps he’s considering the idea that traditional valuations metrics simply don’t apply anymore with certain stocks.
I’m certainly not going to just stop using metrics like price-to-earnings ratio and price-to-book-ratio. I do believe, however, that investors need to apply non-traditional thinking and strategies when it comes to AMC stock.
The Swift Action in AMC Stock
By the time you read this, the price of AMC shares might be quite different than it was during the pre-market hours of Feb. 1.
That being said, it’s certainly possible that AMC stock will start February off with a bang. It’s only a few hours prior to the market open and AMC shares are already up around 20% and the stock is threatening to reach $16.
Really, though, that’s nothing compared to the prior Friday, when AMC rallied 53% to close at $13.26.
Just a few days earlier, AMC was considered a penny stock — defined by the U.S. Securities and Exchange Commission (SEC) as a stock that trades under $5 per share.
Hence, it’s quite remarkable that AMC stock would reach $10 in early February, not to mention $15 or $16.
Are You Truly Ready?
Yet, just because the share price has doubled or tripled in a matter of days, doesn’t mean that it will just keep going up.
Consider the fact that AMC stock closed at $19.90 on Jan. 27, but the next day closed at $8.63. We’re talking about the share price getting cut in half in a single day.
So you have to ask yourself if you’re truly ready to trade AMC. There’s an old saying that trees don’t grow straight to the heavens. That’s a colorful way of saying you shouldn’t buy a stock and expect it to continue upwards indefinitely.
For all we know, AMC stock could end up moving like a roller-coaster ride. By that I mean it could go up really far, just to end up taking the passengers down even faster than they went up.
I don’t typically recommend chasing stocks after they’ve posted 100%-or-greater moves. Nevertheless, an argument could actually be made in favor of buying AMC despite the possibility of a swift retracement to the downside.
Making a Wall Street Bet
The precipitous rise in AMC stock is not likely due to anything that’s actually going on with the company itself.
AMC Entertainment lost a whopping $906 million during the company’s most recently reported fiscal quarter. Moreover, in the fourth quarter, the theater chain reported a 92% year-over-year decline in U.S. attendance.
On the other hand, AMC recently claimed to have secured nearly $1 billion worth of new funding. These were apparently sources through stock offerings and a new line of credit.
Still, those events shouldn’t be sufficient to justify the wild share-price action of AMC stock. After all, stock offerings typically have the potential downside of share dilution.
The reality of the situation is that AMC stock probably went up so quickly because it was featured in the subreddit known as r/WallStreetBets.
The members of that Reddit group supposedly pumped up the GME stock price, and it looks like they’re now doing the same thing with AMC stock.
Users of this Reddit group have a reputation for being relentless in pushing up targeted stocks. Therefore, if you’d like to ride the wave of short-term, sentiment-driven, grassroots-level euphoria, feel free to buy a share or two of AMC stock.
The Bottom Line
It’s probably not a good idea to bet against r/WallStreetBets right now. That subreddit’s influence is currently quite powerful.
Consequently, as long as you’re fully aware of the retracement risk, it’s fine to take a very small short-term position in AMC stock.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, 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.