AMC Entertainment Group (AMC -2.69%) has been the subject of intense investor interest in 2021. Redditers encouraged each other to buy shares of the movie theater chain and hold them until the stock price rose to astronomical levels.
So far, they have successfully driven up the share price of AMC stock by over 1,500% in 2021. Meanwhile, the fundamental prospects of the company remain poor. Through no fault of its own, AMC was devastated during the coronavirus pandemic when it had to shut its doors to the viewing public.
Therefore, it was no surprise to see CEO Adam Aron announce he would begin selling some of his AMC stock later this year.
AMC CEO announcing his intention to sell shares
Here is the announcement from the company's second-quarter conference call:
Two months ago, more than 85% of my net worth was in AMC stock, and proper estate planning for a 67-year-old suggests I should diversify my assets a bit. But I don't want any of you ever to think that I have anything but full confidence in AMC's future. So I will do so under the auspices of the parameters of what is called a 10b5-1 plan, where I pass off all the share trading control of the shares that I own or I'm granted to an independent third-party bank based on parameters of the plan that I only partially set. The plan would not go into effect until toward year end at the earliest, and only a small percentage of my owned or granted shares could get sold in any one month. And that would then be repeated over a period of at least several months. This way, I really have passed on the decision-making to someone else on this important topic.
Interestingly, Aron is going to great lengths in his attempt not to upset the group of investors rallying around AMC stock. If the group reacted poorly to the news and started selling shares, it could substantially depress AMC's stock price. The enthusiasm from the group has lifted the stock price. Disenchantment from the group can have the opposite effect.
The meteoric rise of AMC's stock price in 2021 makes it substantially overvalued. The company lost money on the bottom line four times out of the last ten years, and that's not even including the pandemic year of 2020. Making matters worse, AMC has had to take extraordinary measures to ensure its survival through the pandemic. That included selling massive amounts of equity.
At the end of June last year, AMC had roughly 104 million shares outstanding. At the end of June this year, that figure is up to 480 million. Granted, the worst of the pandemic may be over for AMC, and it is on a path to recovery. However, it will be a monumental task for the company to produce earnings that justify its current share price.
The rise of streaming services and the costs of attending a movie theater are causing fewer people to see films in theaters. A large popcorn can cost you $9 and a large soda $6. That's on top of ticket prices that can reach $17.75 per adult.
If 85% of your net worth is tied up in such a media stock, then selling some or all of your shares would be a smart move, as it is for the AMC CEO. But from an investor's standpoint, I'll stay away from the stock.