As an investor, it's easy to fall into bad habits. For instance, one of the most common mistakes is buying a stock based on momentum or hype. AMC Entertainment Holdings (AMC +2.36%) is a perfect example. Despite a deterioration in its fundamentals, AMC stock is up 1,770% this year as of this writing.
Alternatively, it's often tempting to invest in a market leader, even after the tide has turned. Intel (INTC 3.75%) is good example. The company still leads the semiconductor industry, and the stock looks relatively cheap. But Intel's future is questionable.
Here's why I plan to avoid both of these stocks.
Image source: Getty Images
1. AMC Entertainment Holdings
Last year, the pandemic forced AMC to close its movie theaters, driving attendance and revenue down 79% and 77%, respectively. Moreover, those numbers haven't improved in 2021. In fact, attendance and revenue dropped 89% and 84%, respectively, in the first quarter.
So, why has the stock skyrocketed? Retail investors (who call themselves "apes") have banded together to buy the stock in volume, in the hopes of triggering a short squeeze. To garner support, they've taken to social media like Reddit and Twitter, spreading misinformation to fuel what appears to be a massive pump-and-dump scheme.
Here's the truth: AMC's business is on the brink of bankruptcy. To stay afloat during the pandemic, the company issued new equity at a furious pace. In fact, the outstanding share count has surged 380% since Dec. 31, 2019. Even so, AMC's balance sheet still shows $5.4 billion in long-term debt and $4.9 billion in lease liabilities, but just $813 million in cash and equivalents.
If attendance doesn't improve dramatically in the near term, AMC will be forced to restructure its liabilities, either through bankruptcy or liquidation. And in both cases, shareholders would lose everything.
Perhaps the most compelling reason to avoid AMC comes from the company itself. In a recent 8-K filing with the SEC, management said: "We believe that recent volatility and our current market prices reflect [dynamics] unrelated to our underlying business." The statement explicitly warns investors to avoid the stock unless they are prepared to lose all or a significant portion of their investment.
That's why I wouldn't go anywhere near this stock. Moreover, if I did own shares, I'd be selling hand over fist right now.
Image source: Getty Images.
2. Intel
Intel is the world's largest semiconductor manufacturer in terms of revenue, and the company dominates the market for central processing units (CPUs) in laptops, desktops, and data center servers. Even so, Intel has lost some prestige in recent years.
Specifically, a series of manufacturing problems forced the company to delay its 10nm processors on several occasions. In fact, chips that were slated for release in 2015 didn't actually reach the market in volume until 2019.
Unfortunately, Intel's problems didn't end there. Last year, the company pushed its 7nm chips back to late 2022 (or early 2023), once again citing manufacturing problems. Meanwhile, rival foundries like Taiwan Semiconductor Manufacturing Company lapped Intel, producing 7nm chips in 2018, and 5nm chips in 2020.
Not surprisingly, Intel has lost ground in the x86 CPU market.
|
Market Share |
Q1 2017 |
Q1 2018 |
Q1 2019 |
Q1 2020 |
Q1 2021 |
|---|---|---|---|---|---|
|
Intel |
81.9% |
79.8% |
76.8% |
66.7% |
60.5% |
Data source: PassMark.
These problems continued to haunt Intel in Q2 2021, as evidenced by its mediocre financial performance. Revenue came in at $19.6 billion, slightly lower than the prior year, but its data center business was the real problem. In this segment, sales dropped 9%, and that came on the heels of a 20% decline in the first quarter.
Going forward, I question Intel's ability to outperform the market. The company faces tough competition across all of its business segments, especially in its data center and client computing groups.
Moreover, persistent manufacturing problems continue to put Intel at a disadvantage. Last month, the company pushed production of its 10nm server chip (Sapphire Rapids) back to 2022. Meanwhile, Advanced Micro Devices is set to debut its 5nm EPYC Genoa chip during the same year. Intel is clearly falling behind its very capable competition. That's why I plan to avoid this stock.
