Although retail investors have been putting their money to work on Wall Street for more than a century, they've really asserted themselves in 2021.
Beginning in January, investors on Reddit's WallStreetBets chat room began buying up shares and call options of stocks with exceptionally high levels of short interest. The goal for these investors was to effect a short squeeze -- an event where short-sellers (pessimists) feel trapped in their positions and run for the hills. Buying to cover to close a short position can send a stock with upside momentum into the stratosphere, at least over the very short term.
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AMC has been the apple of retail investors' eyes
Although it was GameStop that started the meme stock craze, movie theater chain AMC Entertainment Holdings (AMC 1.08%) has quickly become a favorite among retail investors.
The almost universal reason that retail investors have chosen to buy AMC stock is the belief that another epic short squeeze is imminent. AMC's shares held short totaled 94.6 million on May 14, which equated to about 21% of its float. If AMC stock were to get moving higher at a rapid pace, the unlimited loss potential for short-sellers, who are predominantly institutional investors, might cause them to call it quits and cover their positions.
Beyond this fixation with short interest, short ratios, dark pools, and synthetic shares, AMC retail investors also believe in the company as a turnaround play. As of May 27, half the total population of the U.S., and 62% of all adults 18 or older, had received at least one dose of coronavirus vaccine. Most researcher have suggested that a minimum vaccination rate of 70% would be needed to reach herd immunity. With most of AMC's theaters located in the U.S., this push toward herd immunity could mean a quicker path to full capacity at theaters.
Box office data has been the third driver for retail investors. Godzilla vs. Kong raked in $429.4 million worldwide at the box office, according to The-Numbers.com. This makes it the most successful film since the pandemic began.
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Bowing to retail pressure cost AMC billions of dollars
But in spite of retail investors professing their love for AMC on social media and believing they've saved the company from hedge funds looking to bankrupt it, they might ultimately be the catalyst that leads to AMC's demise.
Back in March, AMC filed a proxy statement with the Securities and Exchange Commission that proposed a number of questions to its shareholders. Among these proposals was an item designed to increase the company's authorized outstanding share count by 500 million to just over 1 billion. This didn't mean AMC would issue 500 million shares, but it would have given the company the authority to do so.
As the May 4 annual meeting drew closer, many retail investors banded together to oppose the measure. The belief was that doubling the outstanding share count would quell any chance of a sustainable short squeeze. Rather than proceed to the annual shareholder meeting to count the votes, CEO Adam Aron capitulated to retail investors in early May. To allow "additional time for its millions of current individual shareholders to have their voices heard," the company said, AMC pushed its record date for the next proxy statement to June 2, moved the annual shareholder meeting back to July 29, and announced an at-the-market (ATM) offering of 43 million shares to raise capital.
Sounds pretty harmless, right?
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Here's the thing: When AMC pushed back its annual shareholder meeting and set a record date of June 2, it effectively promised to get its retail investors, who are obsessed with a short squeeze, an updated share count by that June 2 date. This meant quickly executing its 43-million-share ATM offering. This offering ultimately raised $428 million, with an average price per sold share of $9.94.
Since this offering was completed, AMC's share price has skyrocketed. On May 27, shares closed at $26.52. This means that expediting the ATM offering because of the moved annual shareholder meeting cost it about $713 million in additional capital that could have been raised. And there's more.
Because AMC used up its last remaining available shares via the ATM offering, management has no way to take advantage of this mega-spike in the company's share price to raise money. If the May 4 vote had taken place and the outstanding-share increase had passed, AMC could be raising billions in capital right now to ensure that bankruptcy is off the table for good. However, the shortsighted greed of retail investors to see a short squeeze through might have effectively doomed AMC for good.
Even with the $428 million the company raised, AMC's roughly $1.24 billion in cash might only be able to sustain the company through the end of 2022. Even if AMC returns to its pre-pandemic operating performance, its interest expense, deferred rent obligations, and leverage are so much higher than they were two years ago that it has virtually no shot of meeting its debt obligations by or before 2026.
Save AMC? If you ask me, Aron's capitulation to retail investors might be what sends AMC into bankruptcy within the next five years.
