Viral meme stocks have seen some crazy days in 2021. Tuesday may have topped them all.
Investment firm Mudrick Capital purchased $235 million of shares of AMC, one of the darling stocks among speculative investors on Reddit community WallStreetBets. AMC shares – already up an obscene 1,100% this year – shot up another 20% on the deal announcement.
Then Mudrick did an about-face, selling its entire stake and telling its investors that AMC is “massively overvalued.” The firm netted about $50 million in just a few hours of work and, against all apparent logic, AMC’s stock actually held on to its gains.
Not Supposed to Be This Way
AMC started off the year as just another beleaguered movie theater chain. Year-over-year revenues fell 88% in 2020 and CEO Adam Aron cast pandemic shutdowns as the “most challenging market conditions in the 100-year history of the company.”
But ever since the stock was embraced by speculative retail investors in January, conventional market logic simply doesn’t seem to apply to AMC:
- Typically, when a company offloads big blocks of shares, it’s at a discounted price. But this time, AMC sold 8.5 million new shares to Mudrick for $27.12 apiece, a premium over Friday’s closing price of $26.12.
- Sometimes, when major investors like hedge funds buy large swaths of shares, they agree to a lock-up period where they can’t resell them. Not in this case – Mudrick was allowed to dump them right away.
- Usually, when a company sells new stock, the share price initially goes down as the market factors in the new supply. Instead, AMC shot right up after the trade.
The Bull Case: Box office results are coming off a slump like no other as we race towards the summer blockbuster season. And AMC said it plans to use the $235 million injection to “go on offense” – acquiring more theaters to capitalize on the reopening windfall.
But not everyone is buying the hype. Scott Zari of S&P told Bloomberg, “Whatever they acquire is likely to come with additional lease expense and will not be large enough to materially alter our view of the company’s cash flow and leverage profile.”
If It Ain’t Broke: Mudrick, a $3 billion New York hedge fund, is well acquainted with this sort of suave maneuver. After all, it made $200 million off AMC during the first meme stock wave in January.