There's a lot going on in the world -- and in your portfolio -- these days. Stocks have generally been drifting higher despite some pretty stiff headwinds in 2020. Some stocks deserve their gains, but many of them do not.
AMC Entertainment Holdings (AMC 4.88%) and DraftKings (DKNG 3.80%) are two stocks I think are best to avoid at this point. You may not agree with me, and that's what makes the market tick. Give me the chance to at least plead my bearish arguments on these two volatile investments.
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AMC Entertainment
Shares of the world's leading movie theater operator have more than tripled since bottoming out in April, and it's hard to see why. Yes, AMC has opened most of its screens abroad, and last week it opened its first 100 locations in the U.S. market. It's opening another 170 multiplexes this weekend. None of this means folks are hungry to return to the movie house.
Despite theaters being closed down for more than five months, less than 0.3% of the U.S. population returned to the movies last weekend, and even then it's not as if they went to AMC. The three busiest theaters screening Unhinged -- the weekend's top draw -- were outdoor drive-ins in California where AMC is still not allowed to be open. The crowds may grow as the movie slate gets better and the social distancing measures are less necessary or restrictive, but movie studios have moved on and begun embracing digital delivery. The multiplex is no longer the only way to screen a fresh release, and that's not going to help AMC's chances of recovering before the credits start to roll -- in more ways than one.
DraftKings
You would think this would be a great time to be a sports fan. Major League Baseball is back just as the NBA and NHL playoffs are running their courses much later in the year than they typically take place. NFL training camps are under way, with the season itself now just two weekends away.
It's against this backdrop that DraftKings -- the leader in fantasy sports wagering as well as a major player in real sports betting -- went public through a reverse merger earlier this year. There's a reasonable bullish case to be made for DraftKings, and I'll go there at the top of the inning before coming back to take my swings at the bottom.
DraftKings is a survivor, and one can argue that the pandemic made it smarter. Despite most of the leading leagues being on hiatus in the second quarter of this year, DraftKings still managed to generate pro forma revenue of $75 million, a modest dip from the $83 million it cranked out a year earlier. DraftKings got there by launching new fantasy sports and betting products for golf, European soccer, UFC, and NASCAR, so the pandemic inspired it to broaden its offerings.
Things will get better. DraftKings sees pro forma revenue growing 22% to 37% in the second half of this year. A follow-on stock offering in June finds its balance sheet flush with $1.2 billion in cash and no debt.
Now let's step up to the plate with the bearish argument. Sports are a mess right now. Games have been canceled as a result of everything from COVID-19 outbreaks within individual teams to social justice protests across all leagues. If you think this makes things challenging as a fan, imagine seeing that through the lens of a gambler. You don't know which players will compete on any given day or if the games will take place. How do you weigh the home-field advantage when the fans are cardboard cutouts or piped in over digital displays? The NBA -- the one league that most generally agree has nailed the restart in the new normal -- has seen its viewer ratings fall sharply this year.
We're heading into a very uncertain pro football season while just some college football conferences will be taking the field in the fall. These are interesting times in the realm of live sports, and we don't know when things will return to normal. Staying on the sidelines may be your best bet with DraftKings until we can actually see the scoreboard.
If you're looking for safe stocks, you aren't likely to find them in AMC and DraftKings.
