Having a long-term outlook has always been an investor's greatest hidden asset. The stock market has been a massive wealth creator over the decades if you had the patience to just sit tight. It's a fairly incredible feat that whether you look back over the last 100 years or just the past few decades, the average total return of the S&P 500 is around 10% annually.
While traders have always jumped in and out of stocks, trying to pick the right entry and exit points, this year in particular has seen a tremendous influx of investors looking to ride the meme stock trend.
No stock represents that phenomenon better than AMC Entertainment Holdings (AMC 0.44%), which is the best-performing stock in the market by far with gains of nearly 3,000% since the start of 2021.
Bringing down the curtain on AMC
Beyond just beating back hedge funds attacking the theater operator with short sales, investors have piled into AMC Entertainment because a vaccinated population can go to the movies once more to see all the films that studios banked during the pandemic. The influx of moviegoers will lift both admission revenue and the highly profitable concession sales, with business getting back to pre-COVID-19 levels.
The problem is that AMC was a business in decline before the coronavirus outbreak. It's not just the theater operator's problem, it's an affliction the entire industry is suffering from.
Theater ticket sales peaked at 1.57 billion in 2002 and have steadily fallen from there. In 2019, fewer than 1.23 billion tickets were sold.
Theaters have masked the decline by charging more for a ticket, so despite falling sales, box office receipts have actually grown. The $9.1 billion generated 19 years ago became $11.2 billion just before the pandemic closed everything down.
That may seem beneficial, but continuously rising prices, particularly with the advent of streaming video, have cut into the need to go to the box office, and all the major studios have committed to supporting their streaming services even as they send films to theaters.
AMC also had to take on significant amounts of debt to survive the COVID outbreak. It ended the most recent quarter with $5.4 billion in long-term debt; $1.6 billion in current liabilities; and $4.9 billion in operating-lease expenses, of which $800 million is due this year, followed by another $1 billion next year.
While it raised over $1 billion this year, it posted a loss of $567 million and burned through $313 million in cash.
AMC Entertainment is not a place for long-term investors to park their money.
Forget AMC and consider these meme stocks instead
Movie theaters aren't going away, but there are better places for your money, even among other so-called meme stocks. That's because they have a stronger business or better growth prospects than AMC. The following three stocks could all give you the excitement of the meme stock craze while offering long-term potential, as long as you don't get caught up in the excitement and overpay.
1. Bed Bath & Beyond
I had pretty much written off home furnishings retailer Bed Bath & Beyond (BBBY) when it was still in the clutches of an entrenched management team with a sclerotic board of directors that failed to challenge leadership to make the changes necessary in an altered retail environment.
Yet showing that hedge funds can be a force for good, activist investors cleaned house at the retailer, clearing out the C-suite and the board, and embarked on dismantling the sprawling collection of businesses that Bed Bath & Beyond had amassed.
The pandemic struck at the worst possible time, just as the home goods store was going to focus on its narrowed core businesses. But now, as the economy is reopening, Bed Bath & Beyond has the chance to shine.
One of the unique aspects of the retailer's business was its ability to generate inordinate amounts of cash. It used to regularly produce in excess of $1 billion of free cash flow (FCF), and just prior to the outbreak it was still generating $750 million worth. Then it was forced to close its stores, and the economy was upended. Yet even as it emerges from the wreckage, Bed Bath & Beyond reported it was already FCF positive, producing $62 million last quarter. Expect that to grow in the coming quarters.
It has invested heavily in its e-commerce platform and its supply chain, and the narrower focus should allow it to return to its pre-eminent position atop the home goods industry.
2. Corsair Gaming
Corsair Gaming (CRSR 3.35%) is something of a more-recent phenomenon, as it only just went public last September. But the esports and live-streaming trend has so much potential for growth that Corsair -- an equipment and accessories maker -- should see tremendous lift in the years ahead.
Unlike many other meme stocks, it wasn't hurt by the pandemic, but rather helped as people were forced to stay home and turned to gaming for their entertainment. Corsair has been around for years and has developed a reputation as a quality manufacturer, so its products were in high demand. Last quarter, it reported record results with revenue soaring 71% over the year-ago period to $529 million, and earnings surging to $0.41 per share from just $0.01 a year ago.
The company is also new to the meme stock mania, only just joining the ranks as nearly 22% of its outstanding shares are sold short. The Reddit crowd obviously sees this stock as one to flip, and the price jumped 13% this week. But that's not the reason you want to buy it.
Corsair makes high-end, high-performance headsets, keyboards, mice, controllers, and gear for live-streaming gamers and content creators. It also sells computer components including memory cards, cooling systems, and power supplies, and has two proprietary platforms, iCUE for gamers and the Elgato streaming suite for creators.
The company points out that data from gaming and esports market researcher Newzoo shows an estimated 825 million console gamers globally in 2020, and over 40 million active gaming channels on Alphabet's YouTube. There are also millions of active streamers across Twitch and Facebook Gaming, as well as on platforms of Chinese gaming sites Huya and DouYu, to drive sales of gaming and content-creation gear.
There's a substantial growth trajectory still ahead for Corsair Gaming, one that shouldn't be obscured by having become a meme stock favorite.
As the original meme stock investment, GameStop (GME 10.24%) might be a surprising choice, particularly in light of the stock trading north of $220 per share, a 1,050% gain year to date. But that's where having patience and waiting for the momentum crowd to move on can reward you. GameStop actually has a turnaround-investment quality that could allow handsome profits.
If theaters are on the decline, then video-game retail stores are sure to follow the same path as Blockbuster Video.
Which is exactly why the new management team, almost wholly brought over from Amazon and Google, seeks to remake the video game retailer into a consumer-focused, online-oriented gaming company. Chairman Ryan Cohen envisions turning it into the "Amazon of gaming."
It's starting from a solid foundation, having used the meme stock trading frenzy that boosted its share price to raise new capital to completely pay off its debt. While that diluted existing shareholders, not something to be taken lightly, it did allow the company to replenish its coffers and position itself to implement its strategy.
Since gaming is increasingly moving toward digital downloads and online play, it's essential GameStop move in that direction as well. Theaters can't really respond effectively to how viewers are watching movies today; GameStop has a chance to reinvent itself in a way few businesses can.
There's no doubt GameStop is the riskiest of these three because it's a bet on an essentially untried transition. But the pandemic did show people turning to GameStop's e-commerce platform in record numbers, which indicates its well-known brand could be a beacon for customers seeking gaming media, equipment, reviews, and more from the retailer.
Instead of betting on AMC's declining business and industry, GameStop is a stock that could pay off handsomely if you wait for it to offer attractive valuations.