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Forget AMC Entertainment. Here Are 3 Better Recovery Stocks

By Jeremy Bowman - Apr 9, 2021 at 8:00AM

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Shares of the movie-theater operator look vulnerable to a pullback. Here are some better ways to capitalize on the reopening.

AMC Entertainment (AMC -6.07%) has become a darling of investors on the Robinhood trading platform and among users on Reddit in recent months. The sudden interest in the movie theater operator has sent share prices skyrocketing this year, up nearly 400% year-to-date.

After the company got an infusion of cash to avoid filing for bankruptcy protection, some investors now believe the company's value will surge on a wave of pent-up demand later this year as Americans return to pre-pandemic activities like going out to a movie. One possible example of that underlying demand: AT&T's Warner Media film Godzilla vs. Kong brought in $48.5 million over the five-day holiday weekend, and it was a hit on AT&T's HBO Max as well (where it was released simultaneously).

However, after AMC's price surge in recent months, the stock is already double where it was trading pre-pandemic, and investors have been significantly diluted by an increase in shares issued. Additionally, the company has been forced to take on high-interest debt. The dilution and increased debt burden will both weigh heavily on any recovery in the business.

For investors looking for recovery stocks, there are some better options out there. Here are three of them.

A man clicking on a digital stock chart.

Image source: Getty Images.

1. Revolve Group

E-commerce was a big winner during the pandemic, but one sector within online retail was not. Apparel mostly struggled as consumers focused their spending on direct needs during the crisis, like home furnishings to adapt to new work-from-home and learn-from-home protocols. Meanwhile, the lack of social events cooled off this segment of the market as apparel sales fell nearly 30% last year, according to the Census Bureau.  

That suggests that the apparel sector should experience a wave of pent-up demand, especially as Americans will be eager to spruce up their wardrobes for social activities and returning to the workplace. One company that is likely to get a significant tailwind from this trend is Revolve Group (RVLV -6.46%), an influencer-driven online apparel retailer that caters to Gen Z and millennials. 

The company's biggest category is dresses, and it specializes in occasion wear, the kind of clothes young adults buy to go to a concert, a wedding, or another social event. With those gatherings likely to start revving up this summer, Revolve should see a spike in demand. There are already signs of a wellspring, as spending on going-out clothes is already on the rise.

Despite a 3% drop in revenue last year, management controlled inventory successfully during 2020, and adjusted EBITDA jumped 25%. That puts the company on strong financial footing heading into the recovery.

2. Affirm Holdings

Tech stocks aren't generally perceived as being good recovery plays, as the industry mostly benefited from the COVID-19 pandemic. But credit card disruptor Affirm Holdings (AFRM -12.87%) looks like an exception.

The recent IPO has been volatile since its debut and now trades near post-IPO lows following a sell-off in March. The central focus of the company's business is a buy-now, pay-later offering that allows consumers to pay in fixed installments, often at 0% APR. It offers both point-of-sale tools in stores and a consumer app, as well as other merchant-based solutions.

Affirm is growing fast with gross merchandise volume up 55% in its most recent quarter, driving a 57% revenue increase to $204 million, but the company's growth could accelerate. With the economy shifting to recovery mode, the moment could be perfect for a product like Affirm. Brick-and-mortar retailers have been devastated by the pandemic, and many will be looking for a way to drive increased sales to help overcome the pandemic-era losses.

Similarly, consumers will also be eager to travel, buy clothes, and spend on restaurants, and are ripe for a financial product like Affirm, which offers 0% APR products that credit cards can't generally compete with.

While Affirm may seem like an indirect way to take advantage of the recovery, the recent sell-off offers an appealing entry point for a fast-growing company in high-value business-digital payments. If it capitalizes on the opportunity in front of it, the stock should move higher from here.

An artist illustration shows Cinderella's castle at Disney

Image source: Walt Disney.

3. Walt Disney

Walt Disney (DIS -1.91%) may seem like an obvious choice, as the diversified entertainment company was hit hard by the pandemic. Even though it's now trading near an all-time high, its performance since the beginning of 2020 has only matched the S&P 500. This indicates that investors may still be underappreciating the business, as the full potential of Disney+ wasn't yet clear then.

After all, the pandemic was a surprise tailwind for Disney in some ways as it helped drive staggering growth in Disney+, which now has more than 100 million subscribers. It also led Disney to restructure its entertainment business to prioritize streaming, something it previously seemed reluctant to do. The company is now experimenting with releasing new movies direct-to-consumer through Disney+ at the same time they debut in theaters, potentially allowing it to capture more revenue from its new movies.

The even better news is that Disney will get a major tailwind when its parks and resorts business can reopen to full capacity, as that business is likely to see huge pent-up demand come its way. Families will be happy to reward their kids with a vacation to Disney World, hoping to put the pandemic behind them, and others will make up for trips that were planned for 2020.

Disney has arguably the best brand in travel destinations, and the attractiveness of its properties only gets stronger when consumers have been deprived of them. In fiscal 2019, its parks and resorts division generated $6.8 billion in operating income, and the company should be able to surpass that figure once the pandemic ends.

Disney was also forced to suspend its dividend during the pandemic, which should return once its business stabilizes, encouraging dividend investors to move back into the stock. Altogether, Disney will emerge much stronger after the pandemic, with a thriving streaming business and what looks like a durable wave of pent-up demand at its parks and resorts properties. That sets it up well to be a long-term winner from here.

Jeremy Bowman owns shares of Walt Disney. The Motley Fool owns shares of and recommends Revolve Group Inc and Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$120.33 (-1.91%) $-2.34
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.41 (-0.14%) $0.03
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$18.12 (-6.07%) $-1.17
Revolve Group, Inc. Stock Quote
Revolve Group, Inc.
RVLV
$23.75 (-6.46%) $-1.64
Affirm Holdings, Inc. Stock Quote
Affirm Holdings, Inc.
AFRM
$31.15 (-12.87%) $-4.60

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

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