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The AMC share price jumps! Should I buy now?

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·3-min read
Young lady working from home office during coronavirus pandemic.
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The AMC Entertainment (NYSE: AMC) share price jumped 25% on Tuesday, surging back to life after several weeks of declines. Indeed, between mid-June and mid-July, shares in the cinema giant fell by more than 50%. Over the past 12 months, the stock’s up nearly 940%.

Following this performance, I’m wondering if I should buy the stock ahead of further gains?

AMC share price bounce

Whenever I look at buying a stock after a big move, I always try to understand what caused the activity in the first place. When it comes to the AMC share price, it seems to me there are two reasons why the stock jumped.

First off, the company published some exciting news on Monday night. Management told investors that after raising several billion dollars from the market, it would be buying two former Pacific Theatres locations in the Los Angeles area. The firm also said it’s in discussions with other property owners regarding buying up more closed locations.

This seems to me to be a sensible strategy. As the AMC share price has soared, management has raised cash by issuing new shares into the market. These issues have helped the firm pay down debt and raise money to keep the lights on throughout the pandemic. Other cinema operators haven’t been so lucky. Many have been forced to close for good.

It looks as if AMC’s management is now going to take advantage of this. By using the cash raised from the markets to acquire closed theatres at discounted prices, management may be able to turbocharge the company’s recovery through growth. Further, the group has also strengthened its balance sheet by paying off debt with the cash raised from the market.

These deals don’t seem to be the only reason why the AMC share price surged on Tuesday. It also appears as if short-sellers are being squeezed out of their positions. Around 15% of the company’s outstanding shares are on loan to short-sellers. And some of these may have had to buy back their positions as the share price rose in value. This buying may have added fuel to the fire.

Time to buy?

Looking past the battle between buyers and sellers in the market, I think AMC is an attractive speculative investment, despite the company still holding a lot of debt. AMC had $5.5bn in long-term debt and $842m in cash through the end of March.

While the firm has been able to raise money from investors to pay off borrowings, there’s always going to be a risk that borrowers will eventually turn away. Moreover, another wave of coronavirus could force the group to shut its theatres again or reduce capacity. In this situation, the company would once again have to take evasive manoeuvres to survive.

Still, on balance, I think the AMC share price is an attractive way to invest in the global economic recovery. As long as the company can continue to raise capital from its investors, I think it may have a bright future.

That’s why I’d buy the stock as a speculative investment for my portfolio.

The post The AMC share price jumps! Should I buy now? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021

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