Please ensure Javascript is enabled for purposes of website accessibility

1 Stock to Avoid No Matter What

By Lawrence Rothman, CFA - Feb 24, 2021 at 6:52AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

AMC Entertainment caught Wall Street's eye this year, but there are reasons to tread carefully.

To put it bluntly, there are certain stocks that belong on your "do not buy list." There are many reasons for this, such as a declining business and an unhealthy balance sheet. While it's tempting to view them as potential value stocks, their price could always fall further as results worsen.

AMC Entertainment (AMC 3.48%) belongs in this category. The stock has had a wild ride this year, starting 2021 at around $2 before shooting up to about $20 by the end of January. Helped by the Reddit group WallStreetBets, the shares got caught up in the short squeeze that also propelled other stocks such as GameStop.

These kinds of moves are unpredictable, and the stock is still more than double where it started in 2021. But investing in hopes of a similar move will likely only end in pain.

An empty theater with a full bag of popcorn on the floor.

Image source: Getty Images.

A hurting business

Certainly, AMC's results were severely hurt by governmental restrictions intended to control the spread of COVID-19. In the third quarter, as authorities relaxed certain limits on public gatherings, revenue fell by nearly 91% to $119.5 million, and AMC's loss widened to $905.8 million from $54.8 million.

However, the company continues to contend with various issues, including shorter periods before movies can appear on streaming services like Netflix, which is hurting movie theater attendance. In 2019, AMC's admission revenue fell by more than 2.5% to $3.3 billion, partly due to lower patronage. Revenue from food and beverages helped offset this decline, rising 2.9% to $1.7 billion. However, the increase came about due to AMC raising prices, which will likely prove difficult to repeat, particularly in a slower economy and amid greater competition from the likes of premium video on demand and streaming services.

COVID-19 merely accelerated the trend of putting movies on these various services quicker. For instance, AT&T's Warner Brothers unit plans to release its entire 2021 movie slate directly to its HBO Max streaming services simultaneously with releasing them in theaters. Walt Disney is taking a more measured approach, mixing theatrical releases with putting movies directly on its Disney+ service.

This sets up a major challenge for AMC since consumers now have various choices for watching first-run movies.

A lot of debt

Meanwhile, AMC has run up quite a debt total. True, it has averted bankruptcy a couple of times last year, but that's no reason to buy the stock. The most recent step was January's $917 million debt-and-equity issuance. CEO Adam Aron said, "Any talk of imminent bankruptcy for AMC is completely off the table."

Before the last capital raise, AMC had $5.8 billion of debt and $417.9 million of cash as of Sept. 30, 2020. Its operating cash flow was -$771.6 million for the first nine months of 2020.

So, while management opportunistically raised money, this only kicks the can down the road. It still needs a solid plan to turn around the operations.

With ever-increasing ways to watch movies, that's a tall order. Perhaps AMC can pull it off, but I wouldn't bet on it.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$12.47 (3.48%) $0.42
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$190.85 (5.03%) $9.14
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$97.78 (3.69%) $3.48
AT&T Inc. Stock Quote
AT&T Inc.
T
$20.99 (1.84%) $0.38
GameStop Corp. Stock Quote
GameStop Corp.
GME
$135.21 (-4.79%) $-6.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.