What happened
Shares of AMC Entertainment Holdings (AMC +2.40%) have fallen 16% so far this week, according to data provided by S&P Global Market Intelligence. There was no specific company news that would have driven this sell-off, so it is likely the selling pressure came after the release of the minutes from the recent Federal Reserve meeting and with the continued bleed-out of meme stocks over the past few months.
So what
On Wednesday of this week, the Federal Reserve released notes from its December meeting. The key points in the report were that it will likely start to raise interest rates to fight inflation and that after it raises rates, it will likely start reducing the size of its balance sheet.
Image source: Getty Images.
Rising interest rates can impact stock portfolios by raising the discount rate investors need when evaluating the present value of a business. With these meeting minutes out, the broad market dropped a few percentage points this week as many investors recalibrated their allocations in more speculative securities. This is doubly true for a meme stock like AMC Entertainment, which has been detached from its underlying business fundamentals since it exploded higher in early 2021. If interest rates rise significantly, it will hurt AMC's ability to raise new funds and pay down debt, which is bad news for the company's future.
Besides this interest rate news, AMC could be down because of the steady sell-off that has occurred in meme stocks recently. Over the past three months, AMC stock is down 38%, and its meme stock partner GameStop is down 20%.
Now what
Even after this recent sell-off, AMC stock is up over 1,000% in the past 12 months, making it one of the top-performing stocks in the world during that time frame. This might make you think the stock has a promising future, but it really just means that it has detached itself from the underlying fundamentals of the business. Even before the pandemic, AMC's movie theater business was barely generating cash, and since the pandemic started, it has burned over $100 million in cash per quarter.
Unless you believe the movie theater business will turn around, which would be the opposite of the industry's long-term trend, buying AMC stock isn't investing. It is participating in a speculative greater-fool game.
