Entertainment and leisure stocks have been extremely hot in 2021 as investors bet that there's going to be a big jump in consumer spending as the pandemic slows and businesses reopen this summer.
Three of the market's biggest winners so far in 2021 have been AMC Entertainment Holdings (AMC -1.61%), SeaWorld Entertainment (SEAS -0.56%), and Avis Budget Group (CAR -1.99%) on the hope that their businesses will rebound quickly. And it hasn't hurt that the WallStreetBets group on Reddit has been a big fan of consumer businesses like AMC.
But is now the time to buy them?
The recovery is coming ... probably
An overarching thesis for these entertainment and travel/leisure stocks is that there is a big recovery in revenue coming in 2021. You can see below that AMC, SeaWorld, and Avis Budget have all seen revenue plummet over the past year as facilities have been closed and consumers have been cautious about returning to public venues. But that could change in 2021, and quickly.
The Federal Reserve recently announced that it expects a GDP growth rate of 6.5% this year in the U.S., up from the 4.2% growth projection made in December. Stimulus checks going out to most Americans will leave more people with excess cash to do things like go to the movies, visit a theme park, or take a vacation. It's not shocking that investors think these three stocks will benefit.
The short story
Another theory for why a stock rises quickly is a short squeeze. Investors who have sold a stock short can be forced to buy back shares when the price rises quickly, "squeezing" them out of the trade. That's a popular theory with AMC but may not hold up to more analysis.
You can see below that all three stocks have a smaller short interest than they did three years ago or in mid-2020, when the conditions for entertainment and travel companies were at their worst.
The short interest may not actually be driving these stocks higher at all. It could be a good old-fashioned increase in expected future earnings pushing shares up.
Should these stocks all be up right now?
I certainly believe that the economy will roar back in 2021, but here's where the bullish case starts to fall apart for me. You can see below that the stock prices for AMC, SeaWorld, and Avis Budget are up big over the past year, despite deteriorating financials. Enterprise value, which includes the debt and equity value of a company, has also risen sharply except for Avis Budget, which sold off a large share of its vehicle fleet and reduced debt that way (without which it would also see an increase in its enterprise value).
I have to wonder if movie theaters, aquatics-based theme parks, and car rental companies are really worth significantly more than they were a year ago, especially when you consider that debt has been added to balance sheets of all three in order to stay afloat.
There could be a windfall of revenue over the next year as the economy recovers. But in the long term, these are still competitive businesses, and it looks to me like they've gotten way ahead of themselves even if operations return to 2019 levels fairly quickly. That's why I think they are simply too hot to handle.