There are some very cheap companies on the stock market right now. Movie theaters, for instance, have been crushed by COVID-19. AMC Entertainment is down a shocking 70% in 2020. Cinemark is down 66%. And IMAX is down 49%.  

Should investors try to catch that falling knife? 

Scared audience in a movie theater

Image source: Getty Images.

Do not buy this scary movie

While the entire market has been hit by COVID-19, that does not mean that every stock will recover as the economy returns to normal. AMC was in a very precarious situation prior to the outbreak. The company is under a mountain of debt. That includes $9.7 billion in long-term debt, and another $585 million in short-term debt. 

While you might think of AMC as the largest movie chain in the world, in financial terms it's verging on micro-cap status. The company's market cap is just $217 million. Would you loan $10 billion dollars to a company that was worth $217 million?

AMC has also stopped paying its rent

Further, AMC has reportedly hired a law firm to advise them on "restructuring negotiations" with the company, according to The Wall Street Journal. This may mean that creditors are concerned they are going to lose most of that $10 billion. It's entirely possible that AMC is heading into bankruptcy court. When bankruptcy starts looking good to you, that's a bad sign for the rest of us.

Who will bounce back from COVID-19?

Here's how AMC stacks up with the competition:

Company Market Cap Profit Margin Debt Stock Return 2020
AMC Entertainment (NYSE:AMC) $217 million (2.72%) $10.35 billion (70%)
Cinemark (NYSE:CNK) $1.31 billion 5.83% $3.39 billion (66%)
IMAX (NYSE:IMAX) $629 million 11.85% $36 million (49%)

Data Source: Yahoo! Finance.

I'm much more bullish on IMAX than AMC. Of course, both stocks have been horrible in 2020. Losing 70% of your money is awful, but losing half your value is no walk in the park. On the other hand, this crash in the share price seems like a really good buying opportunity for IMAX. Not so for AMC. So what's the difference?

AMC's debt is 287 times higher than IMAX's. That's a radical disparity in financial stability. IMAX is flush with cash. The company could pay off its debt tomorrow and have $70 million left over. 

IMAX is also highly profitable, at least it was before COVID-19 came to town. The company had double-digit profit margins before the virus struck, while AMC was already losing money.

Of course, a key issue for investors is when the movie theaters will be allowed to re-open for business. Nobody knows for sure. That's why a number of stocks have crashed in this environment. Retailers are closed. Stadiums are empty. Theaters are bare. We're all shut in our houses, and it might stay this way for weeks to come.

It's important to realize that some wonderful companies (and stocks) have not been hurt by COVID-19 at all. Indeed, this health scare is escalating some pre-existing trends in our society. For instance, Amazon.com has been taking market share from brick-and-mortar retailers for a couple of decades now. And you can talk to your doctor virtually, if you subscribe to Teladoc Health. You can also work from home and meet people over the internet using Zoom.

Not surprisingly, all those virtual stocks are holding up fine, and some are rising dramatically. 

The stocks that have been really hammered represent those businesses where people congregate. So that's why IMAX has been cut in half: Not because it's a bad business, but because large numbers of people sit together in movie theaters.

One way an investor can navigate this mess is by investing in virtual companies that thrive on the internet. But if you want to "play the bounce" and invest in the companies that have been shut down because of COVID-19 and are reopening soon (hopefully), it's important to distinguish the good from the bad.

Understand that the order to close was issued to wonderful and awful businesses alike. While many of us are bullish about a return to normalcy, investors should avoid investing in the bad businesses that have been ordered to close, and focus on the winners who have been shut down. Those are the stocks that are likely to bounce back strong.

This is why IMAX is a good candidate to double in 2020. And AMC, with its huge debt obligations, is a bad investment idea right now.