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Why AMC Stock Is Plunging (Again) This Week, and Cineworld and Cinemark Are Following Suit

By James Brumley - Jul 16, 2021 at 12:37PM

Key Points

  • This sell-off is the fourth straight week these names have lost significant value.
  • Investors are no longer responding to calls to participate in a coordinated effort to push the stocks upward.
  • To the extent it mattered, any fund or institution that was going to cover a short position likely already has, reducing the chance of significant buying pressure.

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The meme stock movement is all but finished, pulling the rug out from underneath all the names swept up in the mania.

What happened

It's been another rough week for movie theater stocks. Despite rebounds on Thursday and/or Friday, names like AMC Entertainment Holdings (AMC 2.48%) and Cinemark Holdings (CNK 1.21%) are poised to end Friday's session nearly 20% below last Friday's closes. Cineworld Group (CNNW.F -13.37%) is leading the way with a weekly loss in excess of 20% as of midday Friday. Shares of Imax (IMAX -0.48%) are faring the best, by virtue of a more-modest loss of around 13%. The setbacks mark the fourth straight week of selling pressure on these once-skyrocketing stocks.

So what

Don't look for a specific reason AMC and its peers took a tumble this week; you won't find one. Rather, you'll feel one. These plunges are the result of a reversal of the meme-stock mania that drove them all to shocking highs in June. Speculative investors -- finally offered a chance to look around and assess the ascension -- seem to be realizing all of these stocks will struggle to justify their still-lofty valuations.

Now what

The rise and fall of AMC shares (and other theater chain stocks that latched onto the volatility) was inevitable, as the rally's roots were untenable.

The quadruple-digit gain logged over the course of the first half of the year wasn't based on fundamentals, but was instead the result of an effort coordinated online to force hedge funds to rapidly repurchase shares of AMC that they had overwhelming sold short, thus driving the price upward.

This so-called short squeeze worked as intended, but arguably worked too well. Shares were sent to prices that not even the company's very best prospective fiscal results could ever justify. Now this reality is setting in. At the same time, many of last month's buyers are locking in profits, adding bearish pressure to the mix.

Falling chart plotted on a chalkboard.

Image source: Getty Images.

Not all traders agree that the induced bullishness that catapulted these stocks has fully run its course. As was noted, some of these names are up on Friday, with AMC shares trading considerably higher from Thursday's intraday low.

That's mostly wishful thinking, though. The gambit might have worked earlier in the year, but now that the strategy of forcing funds to cover their short positions has been revealed, it loses its effectiveness.

That's not to suggest these stocks won't move higher in the near future. It may well happen, as a handful of traders are still convinced these stocks (and AMC in particular) can log a repeat performance. The market might let them have a couple of victorious days. Don't look for prolonged or relatively significant rallies though. For perspective, the analyst community's consensus price target on AMC now stands at $5.25 per share, versus its current price of more than $37.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$24.81 (2.48%) $0.60
Cinemark Holdings, Inc. Stock Quote
Cinemark Holdings, Inc.
$17.57 (1.21%) $0.21
IMAX Corporation Stock Quote
IMAX Corporation
$16.49 (-0.48%) $0.08
Cineworld Group plc Stock Quote
Cineworld Group plc
$0.23 (-13.37%) $0.04

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

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