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There are many players and strategies in the market jungle, but the newest one promoted by "ape armies" to take down short-sellers is quite remarkable.
I decided to take on this topic before the market open when AMC Entertainment AMC shares were expected to open near $40, up almost 25%. By the time the video was rolling, shares had vaulted toward $70, or +100% on the day.
In today's Cook's Kitchen video, I try to address the meme-stock mania with some sober words about volatility, randomness, and the ultimate reason for a company to sell its shares to the public: for investors to participate in the future growth of that business.
That growth always has a price. Among professional investors, it is called valuation.
And I'm not talking about P/E, or the price-to-earnings ratio. I know that AMC won't be profitable for some time and I really don't think we need to care right now.
What we can focus on until then is sales growth. The current analyst consensus for AMC Entertainment sales this year is $2.35 billion, for a nearly 90% rebound vs. 2020.
That's impressive. But is it worth the stock trading a market capitalization of over $25 billion? That's over 10 times sales for a movie theater company.
By comparison, GameStop GME is trading at under 4X sales of about $5.6 billion, with today's market cap push toward $19 billion.
To be fair to the AMC recovery, analyst estimates for next year project over 100% sales growth to nearly $5 billion, which is stunning growth that lowers the price-to-sales metric down to 5X, on an arguably ephemeral forward basis.
For a direct industry comparison, I looked at Cinemark Holdings CNK trading at under 2X this year's projected 117% growth recovery to $1.5 billion in sales.
In the broader leisure industry, I also looked at Cedar Fair amusement parks, as a "fun" reopening play, trading at about 3X this year's expected recovery to $900 million in sales.
Is Short-Squeezing a Way to Make a Living?
In the video that accompanies this article, I try to explain that short-selling is one of the hardest strategies to make a living at in markets, especially a bull market like this one.
GameStoppers and AMC apes have had their fun and made some good money. But as always, I'm worried about the new traders who are getting caught up in the Reddit army revolution to overthrow the evil hedge funds on Wall Street.
It just doesn't work that way. Trillions of dollars are chasing returns and growth and eventually it still boils down to a company's sales and earnings trading at a price that makes some sense, even to the most zealous of bulls.
Virgin Galactic SPCE trades at a $7 billion market cap with virtually no sales because it is a fantastic dream of a company that some investors just want to own a piece of. In that way, it makes sense for those who believe in the future of leisure space travel for the wealthy.
Fundamental Valuation Still Matters
Tesla TSLA is another dreamy company which earns a premium valuation of over 10X sales because it has succeeded where few believed they could, and it may indeed be changing the auto industry for the better.
In the video, I show the sales recoveries of both GME and AMC to demonstrate why the latter may have gotten ahead of itself in the Roaring Kitty revolution.
I also talk about my son who bought AMC in the teens and how I'm trying to teach him to use OCO orders (order cancels order, or "one cancels other") to set a limit price up high (in his dreams of $100) and also maintain a sell stop to lock in profits.
I also tried to prepare his mind for the volatility with a text this morning as he contemplated how he might feel selling too early...
"As you've gotten a taste, much bigger and much more secret apes can whip it back and forth in stop-runs to mess with emotions on both sides. Could go to $50 then $30 then $60 this month. That's insane volatility that will rip account apart."
I didn't think we'd see this kind of volatility by noon when I taped my video.
The problem as I see it is for all those new traders who will get enamored with the mob euphoria and think they are on their way to never-ending riches, as they also take down the hedge funds. How many inexperienced traders were buyers today above $60 and don't have a plan of when to get out?
I'm sure we'll hear some of those stories over the coming months, especially if AMC drops back down to $30. Most likely though, we'll hear more prominently the stories about the new AMC millionaires.
Just remember that those are the few "tail" winners among many millions trying to catch the shooting star by the tail.
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