Amid a bear market for the S&P 500 and Nasdaq Composite indexes, lower valuations have dramatically improved the investment theses of many but not all stocks. Warren Buffett's mentor Benjamin Graham liked to say that in the short run, the market is a voting machine, but in the long run, it is a weighing machine, and not all stocks will support their weight well.

While hype may drive stocks for a time, investors will eventually value stocks on competitive advantages and financials. That reality bodes poorly for meme stocks such as GameStop (GME 0.10%) and AMC Entertainment Holdings (AMC -2.01%).


Perhaps no stock tops the avoid list more than GameStop. Admittedly, the passion and loyalty of GameStop shareholders took the stock from penny-stock status to a high of $483 per share from late 2020 to early 2021. More than a year later, it has held many of its gains with a stock price of around $144 per share as of the time of this writing. Consequently, both analysts and traders continue talking about GameStop stock.

However, GameStop's shrunken competitive moat appears destined to place continuous pressure on the stock price. The stock seemed fatally compromised when the increasing popularity of game downloads turned the once-valued retailer into an unnecessary anachronism.

It has since tried to leverage its name recognition to offer game downloads of its own, a collectibles business, and an NFT marketplace. Nonetheless, GameStop cannot offer consumers any pricing advantages, and now it has just become another collectibles seller. Additionally, the declining interest in NFTs bodes poorly for the recent launch of its new marketplace.

In GameStop's current state, its first-quarter 2022 revenue of $1.4 billion grew by 8%. Still, operating expenses increased by 22%, leading to a net loss of $158 million versus $67 million in the year-ago quarter. Also, analysts expect those patterns to continue as they forecast 7% revenue growth for 2022 and a continued increase in losses.

Admittedly, GameStop's 3,100% returns over two years are eye-popping, so much so that it's planning a 4-for-1 stock split. Still, that surge looks like a one-time phenomenon. Over the last 12 months, the stock has lost almost 30% of its value.

Moreover, its price-to-sales (P/S) ratio of 1.6 is well above retailers such as Best Buy, which sells for 0.3 times sales. Once investors take notice of the "weight" of GameStop's challenges, it will probably struggle to sustain its current stock price.

AMC Entertainment

As the world's largest movie theater chain, AMC has more tailwinds than GameStop. The success of blockbusters such as Top Gun: Maverick shows that people still want to visit theaters. Due to its extensive footprint, some of that interest will naturally accrue to AMC.

However, this does not change the fact that customers seeking entertainment have increasing options such as streaming services and mobile gaming. This will either shrink this business or force AMC to invest more heavily to maintain revenue levels.

Such realities have led AMC to pursue other business lines. Some, like selling its popcorn in grocery stores, make intuitive sense. But the rationale for investing in a gold mine seems harder to justify.

Furthermore, while its peer Cinemark also deals with a narrowing competitive moat, analysts forecast positive earnings for that company in 2022. In comparison, analysts still predict losses for AMC through at least next year.

For Q1 2022, AMC's revenue of $786 million grew triple-digits from 2021 levels. Still, it significantly lags Q1 2019, when revenue came in at $1.2 billion. Also, with a Q1 2022 loss of $337 million, it will probably not return to profitability anytime soon.

Additionally, despite a 65% drop in the stock over the last 12 months, its decline could continue. For one, it has risen 270% over the previous two years. Moreover, its P/S ratio of just over 2.5 is significantly above Cinemark's sales multiple of one. A narrowing competitive moat bodes poorly for all movie theater stocks, but of the two, Cinemark looks like a much better choice.