What happened

Movie theater stocks including AMC Entertainment (NYSE:AMC)Cinemark Holdings (NYSE:CNK)Marcus (NYSE:MCS), and National Cinemedia (NASDAQ:NCMI) were all moving higher today after the May employment report was much better than expected.

The unemployment rate fell from 14.7% in April to 13.3% in May, while economists had expected it to increase to nearly 20%. At the same time, the economy added 2.5 million jobs as businesses began to reopen following lockdowns in March and April. It was a strong sign that the economic recovery is well under way, and investors reacted enthusiastically, sending shares of hard-hit stocks like movie theaters and other consumer discretionary companies surging.

As of 11:16 a.m. EDT, AMC shares were up 10%, Cinemark had gained 8.8%, Marcus was up 12.8%, and National Cinemedia was trading up 14.9%.

At the same time, the S&P 500 was up 2.7%.

A movie theater with a blank screen

Image source: Getty Images.

So what

The unemployment report seemed to confirm that the market's rebound over the last couple of months was not an accident, and that the worst of the economic malaise is behind us even as the economy is still facing double-digit unemployment.

Movie theaters have been one of the worst-suffering industries during the pandemic as they were forced to shut their doors due to stay-at-home orders and social distancing protocols. Even before the pandemic, movie theater operators were struggling as the industry has been disrupted by a wide variety of home entertainment options, including Netflix, meaning these companies were already in weak positions before the crisis. Movie theater attendance in the U.S. actually peaked in 2002. Since then, theaters have managed to increase revenue by raising prices.

Several states have allowed theaters to reopen, but the theaters are hesitant to do so in part because studios have pulled new releases -- they're unsure if they'll get a substantial audience. Instead, studios have sent some films straight to streaming or on-demand.

AMC, the world's biggest movie theater operator, announced Wednesday that it was reopening its theaters in Oslo, Norway, and plans to reopen theaters worldwide through the summer. It also acknowledged the same day that its ability to continue as a "going concern" (stay in business) was in doubt due to the drastic impact of the pandemic, which has forced the company to shut all of its theaters through June. AMC said it had $718.3 million in cash on its balance sheet as of April 30. 

Cinemark, the nation's third-biggest chain, also issued a dismal first-quarter earnings report earlier this week as revenue fell 24% to $543.6 million and it posted a loss of $59.6 million, or $0.51 per share. CEO Mark Zoradi said the company planned to begin reopening theaters on June 19.

Marcus, which operates movie theaters and hotels in the Midwest, said it would reopen its Pfister Hotel in Milwaukee on June 8, a sign that it was also getting back to business.  

Finally, National Cinemedia runs the advertising that appears before movies and is therefore sensitive to the industry reopening and attendance. 

Now what

Part of the reason these stocks are gaining today is because they had fallen so far to begin with. As you can see from the chart below, all four of these companies are still at least 20% below their pre-pandemic levels.

AMC Chart

AMC data by YCharts.

The sector should continue to respond to economic data and other signs of reopening, but investors should be wary of the challenges theater operators face in reopening. They may have to keep some seats empty due to social distancing practices, and it's unclear when studios are going to release movies in theaters again.

The recent spat between AMC and Comcast's Universal, in which AMC said it would no longer screen Universal movies after it took Trolls 2 and other movies to on-demand during the lockdowns, shows the secular threat the industry faces as on-demand and streaming become more appealing to everyone involved. 

Given that, there are probably better recovery plays than this group of stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.